Future 500 | Finding common ground between uncommon allies

sustainable development goals

Investors are stepping up their appeals for robust corporate sustainability reporting, with increased focus on climate impact and long term performance in a carbon constrained world. These reports have been standard for some time, though the metrics and definitions for success have transformed within this framework over time.

Many stakeholders have pressed companies to go beyond the standard ESG approach–which measures performance by limiting corporate impact– and explore ways actually improve the world around them . To that end, some see the UN Sustainable Development Goals (SDGs) as an opportunity to guide companies toward areas of positive, measurable impacts.

Steve Schueth, President and Chief Marketing Officer at First Affirmative Financial Network, has watched the corporate-investor sustainability dialogue evolve throughout his career as a leader in socially responsible impact investing. I sat down with him to explore this latest shift, and what he sees for the future of sustainability reporting.

marvin smith future 500

Marvin: In what ways do you feel like the current way that companies tend to approach sustainability efforts in tracking and reporting come up short, and what is it about the SDGs that you feel like can help us address some of those challenges?

Steve: 27 years ago, 28 years ago, all we really had to go on was the idea of avoiding the bad guys. What we used to call “social screens” were all about identifying companies that were doing things that were unhealthy. They were in businesses which were producing products which, when used as directed, killed or hurt people, caused damage. And frankly, that’s pretty much all we could do, and it was kind of an act of faith that creating an investment portfolio that was not exposed to those bad actors would ultimately deliver better performance.
steve schueth first affirmative capital management
Fast forward 20 years and we’re now in the middle of ESG, and ESG of course is language that was promulgated by the UN PRI, Principles for Responsible Investing, in 2006. Since 2006 the nomenclature has shifted–but more importantly there’s so much more data available to us now. And today the process of ESG factor analysis–which is at the core of every investment strategy that calls itself “Sustainable” or “Responsible” or “Impact”–is now a big data-driven process. So I want you to think about the original SRI, Socially Responsible Investing, “avoiding the bad guys,” as kind of SRI 1.0. I think about ESG as SRI 2.0., heavily data-driven. Lots of information definitely has helped us identify the better companies and has helped us design portfolios where we don’t have to really be very concerned about them underperforming relative to their conventional competitors. Where I think it’s going is where the Sustainable Development Goals are becoming commonly held goals that companies can embrace, that investors can embrace, and that investment professionals, asset managers, can embrace.

So I’ve looked at the sustainability reports that have been published by large global companies for let’s say the past six or seven months. What’s become very apparent is that the SDGs are very much front and center for these large companies. Not that everybody is spending their entire report on this, sometimes it’s a couple paragraphs or a couple pages. In most cases what you’ve got is a big public company saying “These three or these four or these five SDGs really fit who we are, they’re accurate reflections of our mission and who we, our purpose in the world and our core business and all of that, and we’re going to track our progress, measure our progress, against these three or four or five SDGs”. Nobody’s trying to bite off all 17 of them, which is a good thing, but everybody’s trying to take a few. Now from a company perspective I think you take three or four or five SDGs–the ones that are the right fit–and it’s a lot more comfortable. And frankly it makes a lot more sense for the company to be reporting on its sustainability initiatives and progress around those SDGs than it is to report around Environment, Social and Governance factors.

In other words, I can relatively easily see that putting my money with this company, with what it’s doing to improve the world in these five areas that’s helping to create a better world. And therefore I can understand the positive impact story of that particular situation. So it’s beginning to feel to me like this is a win-win-win proposition. And I guess most importantly the SDGs didn’t even hit the scene, if you will, until 2015. Here we are two years later and we’re seeing an uptick. We’re seeing an embracing of SDGs from companies, from investment professionals and from investors, quicker than I’ve ever seen anything else. So I just think it’s an exciting time and what I said to you the other day is I think the SDGs are going to be SRI 3.0. It might take a while, might be a year or two and you look back and say I was right, or might not I suppose–but I think it’s going there, and I think it’s going there fairly quickly. And one of the beautiful things Marvin is that, as you know, we’re going to have some several sessions at the conference in November where it isn’t just going to be my voice speaking to this but we’re going to be whole bunch of other experts on this topic–including people from the UN who will be talking to the vibrancy. It all started out as possibility. Now I think it’s a vibrant reality that the SDGs represent.

“It all started out as possibility. Now I think it’s a vibrant reality that the SDGs represent.”

M: I know that the goal has been national governments will use the SDG rankings or guidelines to guide tax and regulations policies, but that doesn’t seem like that’s going to be the case, at least in the near-term, in the US. Is there a carrot or a stick that needs to exist to incentivise companies to adopt the SDGs? What’s the case that you make to them to build this into the reporting framework?

S: Two things that come to mind are, number one, building off of what you said about there will be other countries that will use these as a regulatory framework, but I think we can aim for that. Moving in that direction I think is very positive that so many of these companies do business in other countries where it’s likely that the SDGs will become part of the regulatory framework. I think that bodes well for their business operations all over the world, but I actually think in the US that investors and investment professionals who are looking for the better managed companies, the ones that today are embracing ESG factor analysis, as they begin to embrace and ESG / SDG analysis process that we, the collective we, are going to become more of a catalyst than the government will be.

Now I suppose once we get out from under the yoke of this current Administration anything is possible. But our history here in the US is that the government has not been a friend and has not been a supporter, at least not in any kind of meaningful, direct way of a more responsible approach to investing. But I’m just ready to write that off and say we have to do this ourselves. It’s the trillions of dollars that are being managed on behalf of people who care–and those asset managers, those analysts, are going to be encouraging companies to become more responsible corporate citizens as defined by the SDGs. I think that’s the way it should go and I think it will.

M: I don’t want to say that we will ever be done, but is this kind of the final step where once everyone adopts the SDG framework we’ve reached the final evolution, or do you see something beyond that?

S: I highly doubt it. I really doubt it. Global capitalism is all built on out-competing, doing better than your competitor. I’ve always believed that companies that are the more responsible corporate citizens and who in turn build their brand identity around that–at least to some degree–tend to do better, attract better talent and have better stock prices, better terms and all of that. On the other hand at the investor level you’ve got all kinds of investment strategies and strategists that are trying to find a way to beat their competitors–in other words, for my fund to do better than the next guy’s fund from a performance perspective.

That’s certainly that’s where ESG came from. It wasn’t just a another way of organizing analysts under three column headings: Environmental, Social and Government; it was also a way to broaden and deepen the analysis of companies and generate more data upon which investment decisions could be made. I challenge you, just take five or six, pick them randomly if you want to, mutual funds or ETFs or asset managers that are in the SRI or ESG space depending on how they position themselves and compare their strategies, they all have something that they think is different and unique from the others. Now is it really? Maybe not. But they’re all looking for something different. And that search for something different, that search for something more, the drive to be better than our competitors, is going to continue to propel this whole thing forward in my opinion.

M: It seems like the competition aspect is a double-edged sword, because on the one hand you want everyone to get better–but as you mentioned in passing you have this system that is constantly looking at producing things. The way that we determine how successful companies are often relies on their ability to produce. Is that inherently in conflict with sustainability? Is our global capitalist system actually compatible with any type of sustainability, if you look at the longer-term picture? Or will that system over time have to change? I realize that’s very philosophical…

S: What it kind of comes down to is the sustainability is about the long-term, it’s about managing resources, it’s about well, I think there is an inherent conflict between producing and buying and using more stuff and having a truly sustainable world. Now, at the same time, I have this belief that there’s plenty to go around. And so it’s really less about having, making, using more stuff than it is about the equity in which that happens, and the way those things are created, and the way those things can be perhaps recycled or composted or turned back into something else. So what comes to mind when you ask that question is the specter, it’s the “replicator.” And I don’t really know how those things work, but I guess in my head I say at one end of the road you have a trash chute– you drop stuff in there, and on the other side of the road you’ve got a replicator that takes the raw atoms and molecules that were in the trash chute and you create food.

I think that’s a metaphor for the world actually. I think it’s a metaphor for the planet. Now the problem is that when you are stuffing way too much stuff down the trash chute too fast and the system doesn’t have enough time to make something good out of it. But I think it’s a matter of timing and volume and being thoughtful, and I think it’s going to require culture change–just like so many of the problems that plague us as a global society will require culture change as to how we use resources, how we think about the long-term, how we all understand. Because there’s still a lot of people who don’t get that we’re all in this together. That this world, you know, literally is a closed system, a closed loop system. In fact one might say it’s the most sophisticated solar-powered recycling system ever devised, at least that we know.

S: I do want to say one other thing for the record: I think it’s important, when you look at this through the eyes of an investor, or through the eyes of any investment specialist for that matter, it’s really important to understand that Wall Street didn’t make this up. This is not a concept or a product or an investment strategy that somebody on Wall Street cooked up and then came out to sell to the masses like pretty much everything else is, or has been. You know, this notion of a more responsible approach to investing, or positively impactful approach to investing, came from the grass roots. Came from people who wanted to have an option or options to invest in a manner that is more in alignment with their personal, moral ethical value system.

And back in the day–in my case from 1989 and other cases since 10 years, 15 years before that–back in those days it was all about personal choice. We had investors that just didn’t want to be conventional. I was with [a responsible investing firm] from 1989 to ’97, and I was out with their wholesalers doing a lot of public speaking. And often times before I was older–I’m a little bit older now–but often times I’d walk into a room and people would say, “Oh, that’s just for the long-haired, Birkenstock-wearing hippies.” And to some degree that was true. Because it was those people that had that inherent faith that they’re putting their money to work–yeah, they expect it to make money, but more importantly they expect to feel good about it. When they wanted to sleep at night, they wanted their money doing something else in the world besides just making more money. They wanted their money helping to create a better world. And so it’s taken a long time, but it’s grown now. It’s a very vibrant industry and you now have major public companies that are adjusting their strategies and their tactics, and their marketing and their branding and everything to respect this growing sense of caring about more than just making more money.

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