Key actions to accelerate mainstreaming Sustainable Capitalism

Allocating Capital for Long-Term Returns in the evolving global economy will, in our view, require investors, asset owners, corporate executives and boards to adopt an integrated perspective on three core ideas (see below). Understanding the interdependent nature of these concepts is critical because they share a connection to the themes that form the bedrock of Sustainable Capitalism: decoupling prosperity from resource-intensive growth, revising investment time-horizons to target sustained value creation beyond quarterly profits, and integrating sustainability factors into strategic decisions and asset valuations.

1. assess carbon risk and price carbon in all capital allocation decisions

The transition to a low carbon future will revolutionise the global economy and present significant opportunities for superior investment returns. However, investors must also acknowledge that carbon risk is real and growing. Moreover, in spite of the impressive leadership emerging within the business community, it is neither realistic nor fair to expect that business can do policy work that only governments can do. As such, we strongly support a regulated carbon price through a global pact or series of regional agreements.

Our rationale for this proposal is twofold: first, the inclusion of a price on carbon emissions allows investors to transform what is currently treated as an uncertainty — an undesirable dynamic for any investor — into a quantifiable, and therefore manageable risk; and second, investors applying a carbon price to valuations will be more likely to appropriately allocate resources and capital to this opportunity-set.

2. use sustainability analysis to enhance investment frameworks

Sustainability is a lens to help investors make better investment decisions. Therefore, rather than bifurcating investment analysis into financial valuation and sustainability valuation, we encourage an approach that integrates sustainability within a rigorous investment process. At the highest level, this means forward-looking analyses of the long term drivers of growth that will likely shape returns on financial and real assets. It is also critical to identify and focus on factors which are material and are relevant within the appropriate investment time horizon.

Furthermore, responsible and engaged ownership is another essential step to sustainable investing, and asset managers have an unambiguous responsibility to vote shareholder ballots and make clear their expectations to management.

3. uphold the full remit of fiduciary duty

Sustainability is an important factor in the long-term success of a business. Therefore, as with any other issue related to the prudent management of capital, investors and companies have a fiduciary duty to include sustainability into decisions.

We propose a shift in the understanding of fiduciary duty towards a comprehensive interpretation, which includes consideration of environmental, social and governance factors in investment strategies. Fiduciaries are tasked with the decision to buy, sell, or hold assets. There is no passive behaviour as a fiduciary; there is no "do nothing". We believe that the active decision to omit sustainability considerations from investment strategies is a flawed understanding of fiduciary duty and that fiduciaries who pursue this interpretation may even be in breach of their fiduciary duty.

Ongoing Research

Our current work builds on the five recommendations for mainstreaming Sustainable Capitalism introduced in our 2012 white paper Sustainable Capitalism [pdf]:

  • Identify and incorporate risks from stranded assets;
  • Mandate integrated reporting;
  • End the default practice of issuing quarterly earnings guidance;
  • Align compensation structures with long-term sustainable performance; and
  • Encourage long-term investing with loyalty driven securities.

Each recommendation for action still merits attention as their development and implementation are ongoing. As such, we continue to explore these topics, along with other themes related to Sustainable Capitalism, through our in-house research and broader scope of activities.