A. Stanley Meiburg
Millennials, defined as those born between 1981 and 1996, are entering the years when investing will become a subject of greater and more widespread interest. While as a group, many will still be focusing on securing careers, paying off student debt with companies like CreditAssociates, raising children, and buying homes. However, some will find themselves inheriting significant resources from their parents and having to make decisions on how to invest this income as part of the estimated transfer of $24 trillion from baby boomers to millennials-the largest transfer of wealth in history (Fink 2019). Some millennials are entering the financial services industry, where one of the key questions will be whether financial portfolios comprising firms that promote sustainability as part of their value proposition can compete effectively for investor attention with more conventional investment products.
There has been a great deal of discussion about whether environmental issues, most notably but not limited to climate change, will be more important as core values to millennials than they are to their boomer parents. Recent data suggests that millennials see themselves this way (Coughlin 2018). At the same time, other surveys suggest that millennials show similar or even less engagement on global climate change than older age cohorts (Kuppa 2018).
For this issue of the JEI, we were interested in exploring the concerns of millennial-age students about how Environmental, Social, and Governance (ESG) factors might play into investment decisions by this group. So the JEI put out a call for papers seeking student perspectives on environmental investing. The intent was to promote the “voice” of those who will reap the future benefits of such investments (and conversely, suffer the consequences of poor investment choices).
The response to this call suggested several things. The first is that environmental investing (and its related concept, sustainable investing) is a growing but still emerging field for millennials, just as it is for the investment community as a whole. The papers we received covered a wide range of topics: analysis of investment risk posed by water shortages or a changing climate; opportunities for investing in unconventional places (for example, “blue carbon” resources); means for improving estimates of factors such as corporate greenhouse gas (GHG) emissions that may be of concern to socially conscious investors; and identification of which sustainability-related factors are likely to be of greatest relevance in driving investment portfolio risks and returns. All of these topics reflect a heightened awareness of the importance of environmental factors as a context for investment decisions.
That said, the scholarly concerns of those who responded to this call are similar to those of their more senior colleagues. To be sure, aspects of these concerns might not have occurred to earlier analysts-as one commenter noted, the term “blue carbon” is unfamiliar to most of the investment community. Earlier generations were more likely to see environmental protection and economic growth as a zero-sum game; contemporary entrepreneurs see pollution as waste and, especially when a price is placed on what is otherwise an externality, they look for ways to reduce it or turn a former waste product into an input for a new product or service (think, for example, of district heating or combined-cycle gas turbines that generate electricity).
Still, the articles in this collection reflect that issues of cost, price, risk, opportunities, market efficiency, and return on investment are as relevant to millennial writers as they are to earlier generations. This is consistent with principles of sustainability. Economic factors are joined with social and environmental ones in any sustainable enterprise, and all three must be considered together. They are of course separable analytically: for example, economies exist at the sufferance of society, and society exists at the sufferance of the environment. But to state the obvious, absent a subsidy, the most environmentally or socially conscious enterprise cannot exist for long in a market economy unless it at least breaks even, and it cannot attract capital unless it offers competitive rates of return. Government can and does subsidize public investments, of course, whether in the form of direct financial payments or protected markets. But, at least in the United States, strong political ideology has expressed itself in opposition to such subsidies, except where they have benefitted political actors (in which case Miles’ Law (1978)-“where you stand depends on where you sit”-applies).
Putting this last case aside, enterprises that promote social and environmental sustainability have to be financially sustainable themselves. The shift in thinking now is that a concern for sustainability can reduce investment risks and enhance potential returns, not that risks and returns are irrelevant to sustainability. The recent letter from Business Roundtable CEOs does not argue that investor returns are irrelevant; it simply expands the range of factors considered as risks and returns to include social and environmental attributes, And it argues that investors should consider customer value, investing in employees, ethics in supplier dealings, and support for communities and the environment, while still “generating long-term value for shareholders” (Business Roundtable 2019).
ESG investing remains a specialized topic in the larger investment community, though interest is growing. According to Ceres, a well-established nonprofit organization that promotes sustainability considerations in investing, its Investor Network now includes over 170 institutional investors that manage more than $26 trillion in assets (Ceres 2019). In 2018, Larry Fink, the Chief Executive of BlackRock, an investment firm with over $6.5 trillion in assets, notably called for executives and boards of companies to “understand the societal impact of your business.” Moody’s Corporation, a credit ratings agency, recently purchased a majority stake in Four Twenty-Seven, a California company that measures signals of climate change. A Moody’s spokesperson indicated that this purchase was important to the company in assessing climate-risk exposures of companies, stating, “You can’t mitigate what you can’t understand” (Flavelle 2019).
Despite their diverse topics, common interests emerge in the five papers included in this edition of the JEI. One concern of all the authors is how to frame a comparison of the financial risks and opportunities of sustainable investing with the more traditional measures of investment performance. For example, Ryan Cook’s paper on “blue carbon” and Jens Christiansen and Marleen Schutter’s paper on the “blue economy” both tackle this question: How do you develop metrics that are capable of convincing investors that there are opportunities (and risks) in these areas? The Zsolt Simon and Chiara Legnazzi paper on tail risk mitigation offers one approach for enabling investors to judge which companies pose material investment risks based on factors not usually captured in traditional indicators. A similar question presents itself in Mette Kjaer’s paper on estimation of greenhouse gases, where the underlying assumption is that investors will care about what a company’s greenhouse gas exposure will be. Professor Erhardt’s comment on the methodological challenges of such calculations reinforces the underlying point: If such metrics matter to investors, they will need trusted, timely, and accurate indices that frame risks and opportunities in understandable ways.
This leads to a second point. Some of our authors appear to be asking the private investment community to take on the job of solving basic social problems. Even putting aside the overwhelming challenge of a changing climate, it is hard to imagine an investor of twenty years ago being asked to frame investment decisions around questions of how to sustainably finance and manage our oceans (Christiansen and Schutter), or make capital investments in the capacity of the oceans to absorb carbon dioxide from the atmosphere (Cook). Historically, both of these policy areas would have been seen as the province of governments and handled through command and control regulations that are more traditional. The fact that our authors are putting forward investment mechanisms as means of addressing ecological dilemmas may represent a recognition either of the power of markets and investment to affect change or of the weakness (or perhaps mistrust) of contemporary governments’ ability to tackle such problems. Or perhaps both.
A third common theme is the writers’ focus on the importance of systems thinking in making investment decisions. Examples of this include risks to sectors dependent on systems for both potable water and the water supply for industrial purposes (Bokern), and the importance of coastal and estuarine ecosystems not just for fisheries habitat but also as integral parts of terrestrial mechanisms for carbon sequestration (Cook). This systems-thinking approach represents an admirable advance over an investment perspective that limited the obligations of corporate responsibility to their obligations to shareholders, thereby incentivizing companies to displace costs (in effect, maximize externalities) to the extent allowed by law. That said, it remains a challenge to make complex human and ecological systems understandable, and to creating appropriate boundary conditions to allow systems to be described usefully to investors. Seeing everything as related to everything else may be true, but it is not useful for investment decisions, which inevitably, even at their best, rely on “bounded rationality,” a term usually associated with, though not precisely coined by, James March and Herbert Simon (March and Simon 1958; Weick 2017).
Beyond the awareness of financial risks
and opportunities, a fourth theme of the articles is how to promote accountability
and transparency in how firms conduct their operations. While this theme is
most evident in the Kjaer article, it underlies the others as well-a
recognition that for many millennials, sustainability concerns are not merely
instrumental values but intrinsic ones. This desire for accountability and
transparency has now become mainstream. The Global Reporting Initiative (GRI)
notes that thousands of firms across the globe have published reports using GRI’s
sustainability guidelines, and that other organizations, including the
Organization for Economic Cooperation and Development (OECD), the United
Nations Global Compact (UNGC), and the International Organization for Standardization
(ISO), have also published guidance on sustainability reporting (GRI 2019). This
demand for accountability and sustainability appears to have become the new
normal for corporations. In a recent survey, Jill D’Aquila, citing data from
the Governance and Accountability Institute, reports that about 81% of the companies
in the Standard and Poor’s 500 stock index issued sustainability reports in
2015, as compared to less than 20% in 2011. Over 13,000 companies produced more
than 80,000 reports worldwide in 2016, and a 2017 survey by the accounting firm
KPMG found that sustainability reporting
has now become “standard practice for large and mid-cap companies worldwide” (D’Aquila 2018).
This highlights a fifth common theme among the articles: It’s all about the data. The refinement of data-whether through the development of better indicators as noted previously, the acquisition of new and better data in unconventional areas, or the development of better analytical tools to assess and turn the data into useful information-gives a strong empirical cast to the submissions we received. The articles examine a wide variety of data sources, both public and private, in the search for the best utility. Spoiler alert: There are no perfect answers.
Nevertheless, even though the articles are all about data, we should be mindful of the value sets on display in framing the questions about what data should be collected and analyzed. The articles take as a given that questions of sustainability and the environment are important and worth considering, and not simple instrumental choices. As noted earlier, it is too soon to say whether sustainability and the environment will be an enduring focus of millennials, since these values compete for attention with more mundane concerns. But the infrastructure for transparency and accountability continues to develop and grow more robust. Moreover, evidence from around the world highlights that even authoritarian regimes feel pressure to deal with environmental degradation. The accelerating and present threats posed by a changing climate have mobilized an unusual degree of common global concern, as symbolized by the Paris Accord of 2015 and follow-on actions, such as the Kigali Agreement on the phaseout of hydrofluorocarbons. While some elements of political opinion in the United States still dispute the significance of increasing greenhouse gas concentrations in the atmosphere, the rest of the world has moved past this. For many reasons, knowledge and information by themselves are not enough to produce effective action to mitigate these consequences, but it is impossible not to be aware.
Both the topics addressed and those not addressed in the papers we received suggest areas for future work. One of the most interesting is the question of what truly motivates people to engage in investment practices that promote sustainability. Is it really just an extension of traditional economic incentives, or do other motivations underlie such choices? If, at some level, a forced choice exists between maximizing short-term returns and making more sustainable investment choices, are at least some investors willing to experience lower rates of traditional short-term returns in exchange for nonmonetary benefits, such as improving income distribution patterns in society or protecting ecosystem services? If so, what are the drivers that produce and encourage such behavior?
A second question is what sustainable investing might look like in other sectors of the economy. An obvious target for study is agriculture. Certainly the demand will be there: The United Nations’ estimate of the median population by 2050 is 9.5 billion people, and by 2100, 11.0 billion people (UN DESA / Population Division 2019). Food supplies would at least need to continue increasing at current rates. One student argues that food production will need to increase between 25% and 70% above current rates; others posit higher rates if developing countries adopt diets that approach those in the developed world (Hunter 2017). At the same time, these needed increases will be facing headwinds from a changing climate. Just in the United States, the Fourth National Climate Assessment notes that such changes threaten agricultural productivity and create pressures on soil and water resources to support that productivity (USGCRP 2018). These same threats will apply globally, if somewhat differently in different sectors. In addition, pest threats to agricultural productivity are also expected to increase (Deutsch et al. 2018). These risks also pose investment opportunities-for more drought-resistant, heat-tolerant crops or improved farming methods that can increase productivity in the face of adverse climate conditions.
No doubt many other examples for further research can come to mind. It does appear, in the words of one observer, that even though sustainable investing hasn’t replaced traditional investing, and many skeptics remain, that “sustainable investing may enter the mainstream faster than expected” and that those “financial institutions not yet compelled into action may soon be pushed into it” (Brown 2018). The interests of these authors in particular aspects of this larger development are heartening. It is my own view that investment and financial incentives are, at the end of the day, no substitute for effective governmental action. But it is heartening to see corporations and investors responding to the world’s great need by stepping up and offering clearer visions than seem to be coming from certain governmental sectors. For many years, political scientists and political leaders have struggled with the notion of governments’ appropriate role in restraining corporate power. How ironic it is to see the emergence of a dynamic where investors’ influence can perhaps push government in directions that are more representative of the common good.
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Coughlin, J. 2018. “Greener Than You: Boomers, Gen X & Millennials Score Themselves On The Environment.” Forbes, May 5, 2018. Available from https://www.forbes.com/sites/josephcoughlin/2018/05/05/greener-than-you-boomers-gen-x-millennials-score-themselves-on-the-environment/ – 56d8a5dd4d8b.
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Biography Dr. Stan Meiburg became Director of Graduate Studies in Sustainability at Wake Forest University in Winston-Salem, North Carolina, in July 2017, following a 39-year career with the U.S. Environmental Protection Agency. He was EPA’s Acting Deputy Administrator from 2014 to 2017, after serving in senior career positions around the country. He was Executive Director of EPA’s Environmental Financial Advisory Board from 2001 to 2010, and currently serves as chair of the North Carolina Environmental Management Commission. Dr. Meiburg holds the BA degree from Wake Forest University, and MA and PhD degrees from The Johns Hopkins University.