Sustainability. It’s the new black and it’s all the rage. You can’t open a business publication without seeing something on Green Investment, or Environmental, Social and Governance metrics or people, planet and profit. Did you know that more than 90% of CEOs state that sustainability is important to their company’s success, that 71% of U.S. consumers want to invest in “socially responsible” companies and that over the past few years the demand for Chief Sustainability Officers has grown by more than 200%?
But with all irony intended, is sustainability, well, sustainable?
It’s certainly well-intentioned. We do a staggering amount of damage to the environment, so much so that the long-term health of the planet may be in danger. And in so doing, we often injure our most vulnerable populations. For the most part, the damage and injury are the by-product of business and industry. Maybe business and industry are in the best position to remedy the issue(s).
In 2018, Larry Fink, CEO of BlackRock, wrote a letter to the CEOs of the world’s largest corporations. He introduced the idea that successful companies must serve a social purpose, that “companies needed to do more than make profits — they need to contribute to society as well, if they want to receive the support of BlackRock.” Not the first time such a sentiment had been expressed, but the first time the world’s largest asset manager expressed it. Sustainable Investing had definitely arrived.
Now, BlackRock and the “green” investment management firms that followed its lead bear an obligation to their investors. As fiduciaries, those companies have a duty to act in their shareholders’ best interest. Increasingly, investors see that best interest as investments in companies that take their environmental, social and governance (ESG) responsibilities seriously.
There are over 800 registered management firms with ESG assets. In the second quarter of 2021 ESG funds had more than $300 billion in assets, up from $100 billion three years earlier.
One by-product of this demand is increased fees. You pay more to invest in ESG funds. For example, Vanguard ESG U.S. Stock Fund has an expense ratio of 0.12%. Its Vanguard S&P 500 is 0.03%. Somebody’s making green out of the green.
ESG investment proponents say that it’s possible to do well by doing good, that companies can do the right thing by the environment and society and be sound investments as well. So, should the conscientious investor avoid certain investments and make a point to actively divest of non-ESG companies?
Harvard University has an endowment of $53 billion, roughly. The managers of those funds have chosen to divest themselves of direct investments in fossil fuels — as have many other fund managers. An admirable sentiment that certainly draws attention, but if you sell your shares in XYZ oil company, you’ll give up your seat at the table to someone who doesn’t care about ESG. And you probably won’t make much of a difference.
Tariq Fancy, former chief investment officer for sustainable investment at BlackRock, said “the problem with financial markets is that they’re so big that you can’t possibly affect them by deciding not to own something objectionable. In five milliseconds, someone who doesn’t give a s**t will go buy it.” A company won’t change its practices just because someone decides not to invest. Especially if it’s making money.
And how much attention do we pay to these things anyway? Do you know each and every investment in each and every one of your accounts? If you’re holding mutual funds, probably not. Bear in mind, if your accounts are managed, your investments change regularly. If you don’t know, but you’ve voiced your interest in sustainable funds, chances are your portfolio manager will gladly comply. Remember, higher fees.
All this said, it’s not like there’s some grand conspiracy to ruin the earth and exploit vulnerable populations. Companies are in business to make money. No surprise there. And to make money, they focus on what they do well — making an effort to deliver to their customers the best goods and services for the lowest cost. A company that delivers on quality and price will compete well and thrive. Those that don’t, won’t.
While it’s certainly true that no matter what your business may be, in the long run, what’s bad for the environment will be bad for your bottom line. But it’s that “long run” thing that’s problematic.
Forty years ago, economist Milton Friedman wrote an essay — “The Social Responsibility of Business is to Increase its Profits.” He argued that a corporate executive is an employee of the owners and has a responsibility to maximize shareholders’ profits.
While current sentiment may have rendered that bald-faced capitalist perspective obsolete, a company that doesn’t make a profit doesn’t survive in the long run. No matter how environmentally, socially and governmentally woke a company may be, it won’t have much of an impact on the long-term welfare of the planet if it goes out of business day after tomorrow.
Economists, Friedman included, often talk about externalities. I’m in the business of packaging and bottling food and drink and delivering said food and drink to stores that sell it to the consumer. I ask supply chain managers to come up with packaging that protects my products, keeps them fresh from spoilage, is lightweight to reduce shipping costs and is cheap to produce. And those smart managers figure it out.
Remember Dustin Hoffmann in “The Graduate”?
Plastic.
And plastic does it all. Great for the food, light to ship and cheap to manufacture. I can deliver my products at a great price and serve my customers well. Except for one nagging detail. Plastic doesn’t degrade. It stays around, virtually forever.
There are five large gyres — whirlpools — in our various oceans. One in the Indian Ocean, two in the Atlantic and two in the Pacific. Marine debris — overwhelmingly plastic — collects in these gyres. And the debris doesn’t just float. It accumulates throughout the water column from the ocean floor to the surface. The Great Pacific Garbage Patch is twice the size of Texas, three times the size of France. That’s one big externality.
Who pays for it? Who pays to clean it up? Who bears the cost of its impact? We all do.
Of course, there’s some finger-pointing. Especially now that China no longer takes our plastic waste. As a packager, I might say that I’ve delivered exactly the product at exactly the price my customers wanted. It’s my customers’ job to recycle the packaging. And my customers might say they did their best to recycle, but virgin plastic is cheaper than recycled plastic, so does recycling really help?
The cost of these externalities gets even more difficult to calculate when we’re dealing with social issues. Hybrid and electric cars are good. Despite the larger environmental costs of building and disposing of them and their battery packs (and plastic), the cars are a net gain for the environment.
In fact, the Argonne National Laboratory, after extensive cradle-to-grave life cycle analysis, can tell you exactly how much better an electric vehicle is than a gas-powered one. But it’s hard to put a number on the loss of water and arable farmland in Chile to extract lithium, or the effect of child and slave labor in Africa to mine the cobalt.
The issues are difficult, and often their complexity doesn’t reveal itself without thorough examination. But sustainability success is possible. Whether you’re a customer trying to do right or you’re a business trying not to do wrong, you can make a difference.
It’s smart to do your research. Like most things in life, there’s no substitute for doing the work. Don’t be satisfied with the placebo, with the easy answer. In fact, that placebo may do more harm than good. Look past the green label.
There’s more to it than that.
It’s become a fashion to use tote bags in the grocery store, not plastic. So, how many times would you have to reuse your tote to equal the resources expended for the plastic?
Some researchers in Denmark put together the facts: paper bags and plastic-based reusable bags, 35 to 85 times; plain cotton, 7,100 times; “eco-friendly organic cotton,” 20,000 times. If you took that organic cotton bag to the store twice a week, it’d be environmentally worth it after 192 years. Bring your plastic bags back to the recycle bin at the grocery store.
Take a breath. Use your common sense and look around. There might be some businesses, some countries, that do a better job than we do. For example, the U.S. manages to recycle 8% of its plastic waste. The EU averages about 40%, Germany 65% and Norway a whopping 97%. What are they doing that we’re not?
And take responsibility, don’t exploit. Just because the pollution or waste or the environmental and social impact happen far away doesn’t mean that the impact might not hit close to home. As much as 95% of the plastic that is transported by rivers into the world’s oceans comes from 10 rivers in Africa and Asia. In developing countries which do not have the infrastructure to deal with environmental and social damage, we should think about extending the producers’ responsibility to create the mechanisms for reduction, reuse and recycling.
Is sustainability sustainable? It better be. The solutions exist, but to find them we have to look, and look past the surface. Because there’s way more to it than that.
— Bruce Kuerten
