Socially Responsible Investing (SRI) and its many cousins, ESG, SI, etc,. represent a multi-trillion dollar growth industry that is here to stay. There are many possible ways to segment and name the industry movement towards sustainable investing. Here’ one paradigm based on style, tenor and articulation.
Sustainable Investing Styles
Integrated: In an integrated approach, sustainability factors are embedded within the portfolio construction and risk management process. Integration holds the best potential as a broad quantitative approach to sustainable investing.
Active Investor: For activism, an investor has taken a proactive approach to encouraging companies to orchestrate changes to unlock embedded value or reduce potential future waste liabilities (FWL’s)
Screening: When investors either screen in or screen out they are typically making a qualitative decision to avoid certain sectors (fossil fuels) or include certain sectors (organic foods) based on the merits of the macro drivers of the industry itself.
Thematic: Thematic approaches tend to first define an overall secular driver, like renewable energy, then drill down to determine quality, value and growth propositions of individual securities.
Building a Model – 5 Forms of Capital
The Future Bright model begins with the recognition that 5 forms of capital that form the basis of a healthy and functioning society and economy: Natural, Human, Service, Financial and Manufactured.
As a predication, Natural Capital and Social Capital are the essential ingredients but history is telling us that these capital forms are degraded and severely strained.
The Future Bright opportunity is about how to unlock the tremendous economic potential in the restoration and efficient use of natural capital and by improving the utilization of labor through localization and proper use of technology.
The risk view captures the potential liability for corporations that ignore their stewardship of essential services provided by stable natural and human capital systems.
This is the basis for the Future Bright model. The Natural Economic view recognizes the whole system to include Natural Capital in the bottom left and waste in the bottom right. Waste should be seen as a potential Future Waste Liability (FWL) or to have Resource Conversion Optionality (RCO’s). The upper left quadrant represents manufactured and service capital. Human capital and demand is represented in the upper right. The arrows in the middle represent financial capital. (c) Future Bright 2015