ROBECO - Wed, 12/13/2023 - 20:13

SI Dilemma: Is 'good enough' good enough in sustainability?

Train or plane? Meat or vegetarian? Net zero or not yet? Investors in the field of sustainable investing (SI) often have to deal with personal dilemmas, as well as the challenge of running their business to the standards they expect of the companies they invest in.

  1. Making incremental changes to personal lifestyles can make a difference
  2. Companies conflicted between sustainable goals and being competitive
  3. Investors face complex trade-offs in separating the good from the bad

It’s not easy. Not all SI specialists are vegan, most still take flights and buy non-essential luxury products. Similarly, many asset managers that have made strong commitments to moving capital to more sustainable companies and supporting positive impacts still engage in business travel, or still offer investment strategies that do not incorporate sustainability considerations.

Is this hypocritical? How much can we reasonably expect individuals and organizations to do to further sustainability goals?

On a personal level:

The UN environment programme describes sustainable living as “understanding how our lifestyle choices impact the world around us and finding ways for everyone to live better and lighter”. We cannot avoid consuming natural resources; we need them to meet our basic needs for food, health, housing and living in today’s society.

However, we can try to reduce the load we place on nature by changing our diets to more plant-based foods, taking the train instead of a car or plane, and reducing personal waste. Most people try to behave more sustainably but accept that sometimes they will take a flight, or eat meat.

In a perfect world, we might all try to emulate Greta Thunberg and cut out everything ‘bad’ from our lifestyles. In reality, this can be exhausting, and potentially undermine the longer-term goal. Making incremental changes and sustaining a lower-impact lifestyle over the long term could ultimately make more of a difference.

On a company level:

How we behave as a corporation can have a much greater impact than individuals. For asset managers focused on sustainable investing, there is also a reputational issue in question – how do we live up to the standards that we expect of the companies we invest in?

At Robeco, we take this seriously with, for example, a net-zero climate commitment that aligns with our expectations of companies in our portfolio. But to achieve the goal of moving capital to more sustainable economic activities, we need to remain in business, and that means staying competitive.

So, how much business travel is acceptable to ensure we stay in touch with our clients and meet prospects? Should we only accept clients that want to invest sustainably? The response to these questions could impact the future growth and profitability of an organization, and even be existential for some companies.

Unfortunately there is no universal right answer. What works for one company, or in one region, or in one sector, may not work in another.

On an investor level:

We have to make decisions about where to invest. The core purpose of an asset manager is to protect the capital of clients – so not investing is not an option. However, all companies – just like all people – consume natural resources and leave some footprint on the environment.

A totally sustainable company simply doesn’t exist. Evaluating how much negative impact is an acceptable trade-off can be a tricky value judgment, but is absolutely necessary in sustainable investing. In rare cases it can be simple – if the impact of a company’s products is negative for sustainable development, such as the much-maligned tobacco sector, then no amount of positive impact to counter it would be deemed as acceptable.

Usually the trade-off is more complex though. For example, is a health care company producing life-saving drugs that are tested on animals having a positive or a negative impact? Different people might have a different opinion, and there might be other issues to consider to come to a conclusion on whether a company causing the least harm possible, or could do better.

At Robeco, we experience this challenge in constructing the methodology behind our SDG framework. We focus on the products and services that companies offer to determine the primary impacts that a company has on the Sustainable Development Goals. But we also look at how they operate, and sometimes how those products are used, and the discussions around methodology and scoring always trigger extensive debate, even between well-informed professionals.

More questions than answers

There are more questions than answers when it comes to evaluating how to behave in all the above situations. All ultimately comes down to making an ethical choice. Most ethical decision-making frameworks require identifying the problem, collecting the facts, involving stakeholders and considering the consequences of the possible different actions.

When decisions are made, monitoring the outcomes and addressing unintended consequences is also key to achieving the desired goal. Whether this is done by an individual, an organization or an investor, this type of decision-making process can help to choose the most appropriate course of action. Most importantly, it can justify actions and intentions to clients, employees, regulators, or to oneself.

To move forward constructively though, we also need to recognize that there is no single answer for everyone. We focus extensively on preventing greenwashing in the financial services industry, and it seems to be human nature to criticize individuals who aim high and sometimes miss.

Yet in the end, the fear of missing ambitious targets or not being transparent in how decisions are made is unlikely to be as helpful in the long run as positive collaboration and feedback that reinforces we are moving in the right direction.


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