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Is Wall Street Beginning to ‘Get’ Sustainability?

Many of us in the sustainability profession look at the voluminous sustainability and CSR reports produced by public companies and wonder who reads them. In particular, we wonder if the analysts on Wall Street read them, and whether they take into account the information provided when making their buy/sell recommendations.

Most of us have noticed that analysts and investors are quick to push share prices into the toilet the minute a company stumbles into an environmental or social disaster (think Massey Energy April 2010 and BP about two weeks later). The fact is that the evidence was there in both cases that these companies had a history of irresponsible behavior, especially Massey Energy, and you could be forgiven for thinking that most diligent analysts might judge they were disasters in the making such that cautionary notes would have appeared in their reports before the roofs actually fell in. But no! Only in very rare instances do you find analysts referring to things like environmental fines, OSHA penalties, or lawsuits from communities in emerging market countries as evidence that a company might be poorly managed and therefore a bad risk.

Wall Street’s insight into the shortcomings of some of its own behaviors isn’t too hot either. After all, injudicious lending in the US housing market in the 2002 – 2007 period was possibly the most unsustainable business model of all time: trillions of dollars of wealth destroyed, untold social damage in the form of people lured into loans they couldn’t afford and their lives now in ruins. There is even significant environmental damage in cities like Cleveland where vast areas of unfinished homes were thrown up in response to the bubble in “no questions asked” mortgages are now wastelands, dumping grounds for trash, and hangouts for thieves and drug dealers. As this recent item suggests, to create a CSR culture, you have to start with Wall Street.

The SRI contingent has been voting its capital to companies with strong CSR/sustainability records for two decades now but even the most recent USSIF report shows that only 1 in every 8 dollars under professional investment management is allocated according to defined SRI criteria.

Fortunately, however, evidence is emerging, not only that firms with highly visible and authentic CSR/sustainability programs actually perform better in financial terms than others (see Green Winners), but that analysts and bankers are slowly recognizing that these firms are deriving clear competitive advantage and tangible financial benefit from pursuing sustainability-based strategies.

Some of the most compelling evidence comes from a rigorous academic study conducted by faculty members at the Harvard and London Business Schools. The Impact of Corporate Social Responsibility on Investment Recommendations suggests that analysts have gone from believing a few years ago that a focus on CSR and sustainability was a net negative influence on financial performance to believing now that the reverse is true, and are factoring it into their investment recommendations accordingly. They also discovered that it is the senior analysts who have followed firms and industries for the longest time and have the best track records that are leading this change in thinking. Even Wall Street analysts get wiser with age, I suppose!

Other encouraging information comes from the recent (2011) Boston Consulting Group/Sloan School of Management survey of executives on attitudes toward sustainability/CSR. Here’s one astonished banker from HSBC who’s had a wake-up call: “You would expect people to say, “Sorry, sustainability is nice, but it’s only really appropriate for boom times.” Actually, the perception has been the other way around. People are seeing that sustainability is part of that next phase of development, and that it will be disruptive and structural rather than an incremental change here and there”.

It’s great to see that many of our corporate leaders are investing time, effort and resources in developing and executing sustainability-based strategies, But it will be truly wonderful when those managing our money are leading the charge to direct capital into the future of these companies – and the world – instead of dragging along at the back of the pack or, worse, trying to persuade us that the future lies with Massey Energy or Countrywide Mortgage.

Graham Russell is founder and principal at Trupoint Advisors, which helps companies achieve strategic success through sustainable business initiatives. www.trupointadvisors.com. Russell writes and speaks on the subject of sustainable business and teaches sustainability in the University of Colorado Denver MBA program.

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