Sustainability: change the metrics, change the world
Centroids
Would love to see what the equivalent would be for governance and politics. Could we change the metrics politicians use to measure effectiveness from poll numbers to civility?
Society for Progress Remarks at INSEAD
https://www.linkedin.com/pulse/society-progress-remarks-insead-jean-rogers
(via Instapaper)
Remarks made June 16, 2018 at Medal Ceremony at INSEAD in Fontainebleau, France
OPENING
Thank you, Julie, for your kind introduction, and thank you to the Society of Progress and INSEAD. I am honored to accept this award for founding the Sustainability Accounting Standards Board. I’m truly humbled to be recognized alongside such a distinguished group. It’s especially an honor for me to share this medal with Allen and Bob, whose groundbreaking work as co-founders of GRI helped pave the way for my own efforts in founding SASB. SASB has stood on the shoulders of many incredible people and institutions - from GRI who advanced corporate reporting, to the USGBC who showed the promise of market transformation for one industry (and led me to believe it could be done for 78 others), to the FASB, who established the premier model for independent standards setting in support of the largest capital market in the world. SASB has benefited greatly from their efforts, innovation, and foresight.
SASB was born out of a very simple idea: what gets measured gets managed. I believed that if we could determine and measure what was material for specific industries, we could create a virtuous cycle, where companies would manage what was being measured, compete on performance, and investors would reward that performance. This was the central idea of a paper I co-authored in 2010 with Steve Lydenberg and David Wood, two brilliant colleagues from the Initiative for Responsible Investment at the Kennedy School at Harvard.
The paper was called “From Transparency to Performance” and it explored for the first time the industry characteristics of sustainability. Mapping the critical issues of our time like climate risk and human rights into industry language effectively translated the language of advocacy into the language of business. It became the roadmap for SASB. This concept has resonated so strongly with investors for a very simple reason: financial analysts cover industries, not issues.
For the first time sustainability issues were thought of as industry factors – factors that could affect risk and return depending on exposure. The industry approach was the key to mainstreaming sustainability considerations in portfolio construction. It has also enabled important new insights regarding which issues are systemic, and which are endemic. Take climate risk, for example. For the first time, we can see the patterns in a portfolio. Because it affects so many industries, a typical investor can’t manage portfolio risk through diversification. Instead, they have to care about improving the underlying performance. It just so happens that’s what our planet needs as well.
Fast forward 8 years. SASB has engaged with thousands of market participants in developing the standards for 79 industries across 11 sectors. It is supported by an incredible Investor Advisory Group with more than $26.2 AUM. Now, we will begin to see what these standards can do for the market.
UNLOCKING CAPITAL BY FOCUSING ON MATERIALITY
First, they will point the way to better returns. In 2016, Harvard professor George Serafeim used SASB’s framework to show that companies that focus on improving sustainability performance only material issues significantly outperformed the market over a 20-year period- by approximately 4.2%. What was unique about George’s work was not just that it found alpha associated with sustainability performance, but that it looked at different factors for different industries. Essentially, George proved the materiality of sustainability. This was a watershed moment for SASB, and for investors, because sustainability and fiduciary duty could now be aligned – though materiality.
Armed with that evidence, we knew we could literally move markets. Think for a moment about all the money that currently goes to address sustainability challenges in the form of philanthropy – it’s about $60 billion. Now take all the endowments and align those investments with societal goals – that’s about $1 trillion. Now, let’s move all the capital in markets toward more sustainable outcomes —that’s $118 trillion. That's the scale that can be achieved from the shift in mission-based to materiality-based investment approaches.
Now you’ve got capital on par with the scale and the urgency of the challenges we face that can be put to work. That’s what market infrastructure can do. That’s the capital SASB aims to move. And I think we can, because no one has to make investors care about material information.
EFFICIENT MARKETS, FAIR MARKETS
The second outcome we will see is greater access to market information. Markets have a beautiful, ruthless efficiency when comparable data is available to investors. They are able to price risk and reward performance. But efficient markets are only one part of our goal. Fair markets are just as critical.
Material information is valuable information—those who have it can profit from it. Chasing alpha by integrating ESG is now trendy among asset managers. But they are not fans of transparency because they prefer to trade on an information advantage. But the real advantage is in floating all the boats – moving entire industries in a more resilient, sustainable direction. In alpha becoming beta.
All investors deserve access to material sustainability information – not just those with Bloomberg terminals on their desks or the means to file shareholder proposals. We need to be vigilant in supporting market standards that provide equal access to material information.
MOVE TO PERFORMANCE
But the main benefit, the third outcome, of market standards like SASB, is the shift from transparency to performance. That’s when SASB will have the impact that it is designed for. It is only through improving performance on the underlying social or environmental issue that we can link it to financial returns. So, let the games begin. I predict that we will see a wave of leaders who will begin to compete with their peers on material topics. Why am I so sure this will happen? Because history tells us so.
It happened with the USGBC. I lived through the transformation of the green building industry led by the US Green Building Council. It was founded in 1993, by my friend David Gottfried. Since it was founded, the building industry has collectively saved billions of dollars in energy, and significantly reduced the carbon footprint of a sector that produces 25% of global GHG emissions. By 2018, green construction will directly contribute 1.1 million jobs and $75.6 billion in wages in the United States. The scale of it continues to double every 3 years. But the statistic I love is that approximately 2.2 million square feet achieves LEED certification every day. That’s about 50 acres of buildings. I was in a tiny airport in the Galapagos islands last year and there was a LEED plaque on the wall. The impact of the USGBC makes my head spin. And how did it all begin? With an articulation of what matters—by the industry, for the industry.
Architects, engineers, developers, real estate agents and building owners came together to ask the question: what is a green building? Hundreds of conversations later it emerged: Site consideration, healthy materials, energy efficiency, water, daylight, natural ventilation, green space- now there was a framework for the topics and the metrics that mattered. Teams could work to a shared vision, and investors could compare performance on their real estate assets. Moreover, LEED captured the hearts and minds of a generation of young building professionals like me. You didn’t just want to be on the design team for a standard Class A office building, you wanted to be on the design team for the LEED Platinum project- because that was where the innovation was happening. Green building attracted the best and brightest. It even became a badge of honor with progressive owners - they competed to have the greenest headquarters or museum. Over time, the business case was established - better performance = higher occupancy, higher productivity, higher valuations in the market. It was a movement. Proof of concept that what gets measured gets managed and rewarded. And now, it’s de rigueur.
So this is why I believe not only that it can be done, but that it has to be done. Because the scale and the urgency of the problems we are facing as a society are continuing to magnify. Climate change, resource scarcity, population growth even a culture of consumption are outpacing company-led innovations. We must get entire industries moving in a sustainable direction.
UNPRECEDENTED CONVERGENCE
The good news is that we are now witnessing an unprecedented convergence of value and values among the investment community, particularly in Europe. Beyond financial materiality, investors are rightly concerned with the long term stability of their holdings in the face of macro-economic risks like climate change, and they are more broadly concerned with sustainable development goals. This brings with it a whole new set of information challenges, financial product needs, and fiduciary considerations as some seek to expand the concept of materiality from an investor point of view, to that of society.
The European Commission has just announced its first legislative package in support of the Sustainable Finance, containing proposals for investment criteria, disclosure obligations, and new benchmarks. If adopted, this will truly be transformational for the markets – an alignment of market forces with societal concerns, and a model for other capital markets.
CALL TO ACTION
A new era is on the horizon – not just for transparency, but for performance. I see signs of it nearly every day. For example, Russell Investments recently developed a new methodology to rate corporate performance on material environmental, social, and governance factors using the SASB standards as key inputs. In the past year, we’ve seen Vanguard and BlackRock exhort companies to integrate sustainability considerations into corporate strategy for the long term. And we’ve seen companies continue to innovate on the sustainability front, recognizing that effective management of social and environmental capital can be a competitive advantage. The SASB standards are catalyzing a new generation of ratings, indices, benchmarks and products that are taking a material approach to sustainability.
This brings us one step closer to the vision I’ve long held -- that anyone can type in a ticker symbol and pull up sustainability fundamentals right alongside financial fundamentals, and invest according to their convictions. We aren’t there yet, but I know we’ll get there—- because of the great work being done by those following in our footsteps: academics engaged in cutting-edge research and next-level thought leadership, corporate professionals adopting integrated strategic approaches, investors exercising their right to material information, and citizens demanding transparency and accountability. All investing is impact investing. Together, we can empower the market to understand those impacts.
And so, I welcome each of you to stand on our shoulders, to look out on the horizon, to discover new truths and new paths forward for our markets and for our society.
Thank you again for this incredible honor.
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Speech delivered by Jean Rogers, Founder of SASB
at the Society for Progress Medal Ceremony
INSEAD, June, 2018