Global Sustainable Investing – the Next Stage in the Evolution of Socially Responsible Investing

16 05 2007

 This is a truly great article Urban Core International came across on sustainable investing. Mary Barrett, Managing Partner and Founder of Edgewood Partners has done an amazing job on truly showing the value of  socially responsible investing.

Global Sustainable Investing – the Next Stage in the Evolution of Socially Responsible Investing

Global Sustainable Investing, represents a higher standard of investing and is based on a carefully-researched universe of companies. These companies have chosen to integrate sustainable business practices into all aspects of their operations. Common sense, as well as recent studies, confirms that companies with strong corporate governance, pervasive environmental policies and collaborative management styles have less risk and perform better over time.

Edgewood Partners has developed a research methodology called ResponseAbility that helps us identify companies that are leaders in integrating sustainable business practices. Our process begins with a qualitative analysis that scrutinizes the overall societal impact of the company and its products. Only about 20% of companies pass this initial screen. We rate the remaining companies on the basis of their compliance with a weighted list of economic, social and environmental criteria. There is a minimum score for inclusion in our universe of sustainable companies. Lastly, companies are subjected to rigorous financial and valuation analysis. When an investment is considered for a client’s portfolio, we evaluate it in terms of the client’s risk profile and any specific avoidance preferences. We monitor all companies in our sustainable universe on an ongoing basis.

The goal of social investing over the past 25 years has been to create positive change at major companies, primarily through shareholder activism. We applaud the dedicated professionals who are supporting that approach. However, Edgewood Partners has taken a different approach. By investing only in companies that have embraced sustainable business practices, we seek to draw attention to their superior performance and to the fact that sustainable business practices create long-term value for shareholders. We believe there is no better impetus for change than observable success and that sustainable companies will serve as role models for others to emulate.

Over the past five years as we have been developing our investment strategy, we have made some interesting observations. We would like to share what we have discovered with the readers of the Green Money Journal and soon with a broader audience in our forthcoming book – “How Values-Driven Companies Are Beating Out Profit-Driven Companies.”

First, we have observed that companies pass through Three Stages of Sustainability:

Stage One companies recognize the desirability of responsible business practices and may investment in “green” technologies. However, they remain strongly profit-driven and avoid taking the steps that would represent a true commitment to sustainable business practices. BP and GE are examples of Stage One companies.

In Stage Two, companies have experienced an epiphany, a new level of awareness – a change of mind. They recognize that sustainable business practices may be costly and time-consuming in the short-run, but also that they are the true basis for creation of shareholder value in the long-run. Some examples of Stage Two companies are Ericsson, Nokia, Whole Foods Markets, Infosys, Starbucks, Respironics, AFLAC, and Southwest Airlines.

In Stage Three, companies recognize their role as global citizens and their responsibility to help solve intractable world problems. From this higher level of awareness, cooperation is seen as superior to competition; collaboration as superior to traditional management, and a values-driven ethic as more powerful than the profit-driven ethic. At this stage, there has been a change of mind and a change of heart. The transition from a strictly profit-driven company to a values-driven company has occurred. Some examples of Stage Three companies are Toyota, Interface, and Herman Miller.

At Edgewood Partners, only Stage Two and Stage Three companies are part of our sustainable universe.

Building a Sustainable Business Model

Creating sustainable business on a global basis requires a paradigm shift. It demands a new way of working, thinking, and being. The mind that created current problems is not the mind that can solve them. The old way of thinking and working is an outmoded hierarchical model based on a profit-driven ethic. The new way of working is a collaborative model based on an evolving values-driven ethic.

According to a Gallup survey, 78% of employees in the U.S. are not engaged in their work. Lack of engagement is actually a world-wide phenomenon and the figures are even higher in the U.K. and some developing countries. It is not hard to imagine that employees would be far more productive and innovative if they were engaged in their work. Clearly, this is a leadership crisis of huge proportion.

At Stage Three and more advanced Stage Two companies, we have observed that employees are very much engaged in their jobs. Quite typically, engagement translates into higher productivity, greater job satisfaction, better customer service and, ultimately, a higher return on investment than is demonstrated at their non-sustainable competition. In every case, the driving force for engagement has been a purposeful leader, who has successfully connected work at these companies with a higher purpose, such as service to mankind through product/service quality, excellence and value.

Shared purpose provides the basis for shared responsibility, ethical behavior and strong corporate governance. Because cooperation is valued over competition, an atmosphere of trust is created that fosters risk-taking and innovation. While a collaborative management style is far more time consuming in the initial stages, the habit of creating ownership and alignment at every stage of a project almost guarantees successful and relatively problem-free implementation.

Not surprisingly, sustainable business practices also reduce several forms of business risk. Pervasive environmental and safety policies reduce the risk of costly remediation, employee endangerment, and fines and legal action by environmental agencies. Strong corporate governance reduces the risk of class action suits, damage to corporate reputation and legal prosecution of errant management.

Again from an investment perspective, our work indicates that sustainable companies as a group have lower risk and provide higher returns over time than traditionally-managed companies. Depending on client objectives and risk-profiles, we seek to further reduce risk and increase return with global diversification and socially-responsible alternative investments. In terms of our company goals to optimize performance and carefully manage risk for our clients, we are very comfortable with our investment strategy.

Our mission as a firm is clearly client-driven. That mission is part of our commitment to a values-driven ethic, which we believe provides the framework and underlying motivation for sustainable business, our own, as well as those in which we invest. By collaborating with others to invest in companies that embrace sustainability principles, we believe we are contributing in several ways to a sustainable world.

For more information contact Edgewood Partners at-

Article by Mary Barrett, Managing Partner and Founder of Edgewood Partners



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