News | 18th March 2019

The Future(-Fit) of Investing

By Martin Rich

One of the reasons I started on the journey of co-creating what would eventually become “Future-Fit” was a strong desire to enable investors to understand the holistic impact of each and every portfolio they either manage or decide to invest in. Understanding this impact, and its relationship to financial risk-reward characteristics, is critical if we are to intelligently direct capital towards investments that are truly sustainable – in every sense of the word.

Every portfolio, without exception, has an impact on the planet and society. Some of that impact is positive and helpful, and some – well OK, quite a lot – really isn’t. Investors rarely deliberately seek to pursue negative impacts. It’s just “the way things are”, right? Most companies emit greenhouse gases in some form, so if you’re tracking an index of mainstream companies, your portfolio has a carbon footprint. You get the idea.

The thing is, the world is changing rapidly, and investors need to keep up if they don’t want to become stranded assets themselves. Society’s rapid expansion and entry to the Anthropocene[1] means that we are facing existential levels of environmental disruption. The prospect of well-over 9bn people needing food, water, clothing, housing, healthcare and jobs threatens ever-increasing inequality and is driving diminishing social cohesion. Throw into the mix the enormous disruption that technology will continue to create in the coming decades, and no financial manager with any legal or moral duty can simply bury their head in the sand and pretend none of these changes will impact the companies in which they invest.

Without attention, these factors will hit both financial performance and investors’ reputations. Stranded assets (Peabody Coal), human rights abuses in the supply chain (Primark), technological shifts (Kodak, Nokia), poor governance (BP, Volkswagen) and law suits (pretty much every global bank in recent years, and likely every oil and gas company in the future) are only the tip of the quickly-melting iceberg. In other words, it doesn’t matter if investors are investing purely for financial value, or to reflect the values of their clients, or both. This Stuff Matters.

As Andrew Parry, Head of Sustainable Investment at Hermes Investment Management puts it, “With ESG integration increasingly accepted as a prerequisite of good investing, investors are using sustainability as a means to better understand how companies integrate such considerations into their future business and capital allocation strategy. To have a sustainable franchise, a company must have a sustainable social and environmental licence to operate.”

So just imagine if we actually could understand the holistic impact – positive and negative – of every company in a portfolio. Imagine if the data was in a form that allowed it to be aggregated so that the impact of an entire portfolio was understood. Imagine how one could use that information to engage with companies and understand the direction in which they are moving. Imagine how one could construct portfolios to reflect client values, and to maximize financial returns from identifying companies that were properly prepared for the future.

The good news is that we did more than just imagine. This is precisely what the Future-Fit Business Benchmark does. It enables any company to examine its full value chain, from R&D through to product end of life, and understand its social and environmental impacts – both intended and unintended – based on required future behaviour, not simply relative to today’s best-in-class performance. The information that flows from this analysis uniquely enables investors to understand where any company is today, the gaps it has to close, and importantly the commitments it has (or hasn’t…) made to so doing.

As Amy Clarke, Partner & Co-founder of Tribe Impact Capital says, this is the future of investing. “Business as usual hasn’t been good enough for a long time. And chasing down sustainability as a risk management strategy is only half the equation. We need a new benchmark for performance, and a new vision for strategy. One which addresses both risk and opportunity, and which enables businesses to become their truly ‘fit’ future self. The Future-Fit Business Benchmark helps us, as investors, better identify those businesses truly committed to being real forces for change and opens up opportunities for us to partner for long-term value creation for all.”

Future-Fit is working with its Development Council corporate and investor members to develop tools and case studies to help bring all of this information to life, and to encourage more organizations to join our growing community. If you’re planning on attending the Sustainable Brands Paris conference in April, then come along to our session and engage in conversation with a number of our members – including Amy and Andrew. You’ll learn not only about the Benchmark, but more importantly how you, as an investor, can take the next step towards truly sustainable investing. Just don’t forget to bring your imagination.

[1] The age – or “epoch” – when mankind is the dominant factor on Earth’s system processes. Personally, given the prevalence of plastic throughout the planet these days, I prefer the term “Plasticene”. (If you get the joke, join me in using it and at least we’ll die laughing…)

Martin Rich Co-Founder & Executive Director

Martin is a sustainable investment specialist, with over 20 years experience in both mainstream and impact finance.

View profile