With Leonardo DiCaprio raising awareness on climate change, Emma Watson advocating for gender equality and Matt Damon co-founding a company to address water scarcity, sustainability has gone mainstream. So what has prevented this movement from extending further into the financial markets?
Let’s first look at what sustainability looks like in financial terms. In sustainable investing, the ideal scenario is when you find opportunities that produce the highest returns and have the highest positive impact.
However, more often than not, there is a tradeoff to be made. On one end of the spectrum, sustainable funds can be philanthropic, or impact-driven, meaning the fund will be maximizing for impact subject to profits. Conversely, hedge funds that integrate non-financial sustainability metrics into their investment framework will be seeking to maximize profits and fulfill their fiduciary duty subject to impact. Here, the byproduct is better risk-adjusted returns by incorporating more relevant information.
Going back to the question of why sustainability hasn’t made greater strides in financial markets, it’s helpful to look at how a movement becomes successful. To begin and persevere a movement that effects real change, it needs not only leaders, but even more importantly, those first followers who can draw momentum to the movement to achieve critical mass. At that juncture, the comfort of being among the skeptics has shifted to being among the believers. Those who do not want to stand out will conform to the change, and the body of followers grows exponentially. Derek Sivers points to the famous “Sasquatch Music Festival 2009” video for a visual representation of that movement.
As simple as that methodology for change looks on paper, the truth is that social movements take considerable time and the removal or leapfrogging of many obstacles. Financial markets have been around for hundreds of years, so prior notions and dispositions need to be challenged. This initial work has been performed by funds such as Generation, Impax and Parnassus. They broke the status quo and proved to the markets that sustainable investing can be a significant part of investing’s future, in the 21st century and beyond. Further, early adopters have joined those leaders to establish the movement as a reckoning force. However, to truly enact a sustainable and permanent change, the most significant obstacle still must be removed — the concentration of assets under management.