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Experts Explore the Payoffs of Investing in Sustainability

In 2012, investors may want to bet on “green.”

“Companies that actively manage environmental risks – and take advantage of associated opportunities – increasingly seem to outperform those who don’t in the stock market. That could be a very good thing, both for shareholders and the planet,” I was quoted as saying in a recent Newsweek article on green rankings.

In other words, green companies tend to perform better in the stock market and are worthy of investment consideration. I spoke recently at the University of Virginia Darden School of Business at the invitation of the student club, Darden Capital Management, which provides students the opportunity to manage $6.2 million in funds, including the Rotunda Fund, a portfolio of stocks from companies that maintain sustainable business practices.

What I think of the term “sustainability investing” was long thought to be a screen of sorts to weed out “sin stocks,” such as tobacco. Now, sustainability investing counts companies’ positive works. For example, a 2009 performance study showed that companies that mind their environmental, social and governance (ESG) business factors exceed the S&P 500 by as much as 4.8 percent.

At the event, Dean Krehmeyer, executive director of Darden’s newest Center of Excellence, the Initiative for Business in Society (IBiS), remarked, “ESG metrics offer one important way to track how businesses are creating value for society and enable comparability for identifying best-in-class organizations that exemplify long-term thinking.”

Darden Professor Rich Evans also believes that sustainability investing holds a distinct opening for investors.

“With above average risk-adjusted performance over the previous three years and below average fees, funds that focus on sustainable and socially responsible investing (SRI) present a unique opportunity for investors,” said Evans.

Evans teaches a case on sustainability investing in his Second Year course, “Investments.” In 2012, his research will continue to focus on how investors make decisions when managing portfolios.

Choosing the right stocks begins with analyzing the information companies report. These days, the green information is a little easier to find.

“Sustainability reporting, or adding ESG metrics to investor analysis, is becoming more mainstream,” said Erika Herz, Darden manager of sustainability programs and managing director for the Alliance for Research on Corporate Sustainability (ARCS), an organization that advances research and convenes scholars addressing sustainability issues in business.

She believes that sustainability reporting sheds light on short-term earnings, but also a company’s long-term value. “Good governance is a proxy for a strong future,” Herz added.

The students who run Darden’s Rotunda Fund, with support from Darden Professor and Faculty Advisor Yiorgos Allayannis, also consider ESG metrics when making investment decisions. Valued at $750,000, the fund uses both a sustainability thesis and an investment thesis to identify stocks that the students believe have the best potential to perform.

“With the shift away from defined benefit plans and towards defined contribution plans, people have an increasing say in their asset allocation decisions. We believe that the growth of SRI shows how people are looking to put their money towards investments that make a positive contribution to society,” said Class of 2012 MBA student Peter Lee, manager for the Rotunda Fund. “Through the Rotunda Fund, we’re aiming to show how investing for good can be a legitimate investment strategy that can generate attractive returns.”

A potential advantage for shareholders, sustainability investing also provides incentives for companies to act greener and increase transparency.

Cary Krosinsky is senior vice president of North America for Trucost, advising financial and corporate clients. Previously, Cary was a member of CapitalBridge’s Operations Committee, providing leadership on data and analytics. Whilst there, he worked with Trucost on their award winning 2006 UK Trust Carbon Footprint and IFC sponsored Carbon Counts Asia 2007 studies. Cary is a member of the 70 person Expert Group that created the UN Principles for Responsible Investment (PRI).

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