CPA Resources
CPA Resources

Education, due diligence key to sustainability investing

WASHINGTON, Oct. 1, 2009 — Interest in sustainable investment projects is on the rise as institutional investors look for alternate investment structures after the collapse of the markets in 2008.

However, Watson Wyatt warns that investors could face additional risk if they invest in these projects without educating themselves or determining whether they align with their investment beliefs.

Sustainable investment (SI) is a broad term encompassing a variety of approaches that incorporate environmental, social or corporate governance (ESG) factors in investment processes and ownership activities. Examples include investing in environmental infrastructure, clean energy or sustainable transportation.

“SI has taken off for many reasons. The United Nations-backed Principles for Responsible Investment (PRI) gave it considerable support globally, and more recently, in light of the economic crisis, investors and shareholders have been more open to reassessing their role within the financial system and the broader economy,” said Carl Hess, global head of investment consulting at Watson Wyatt. “Similar to any burgeoning investment viewpoint, as SI moves into the mainstream it is important that investors test the waters before diving in.”

Watson Wyatt investment experts advise that the first step investors should take is to define their investment beliefs. Most investors will fall into one of three categories — advocate, neutral or dissenter — depending on how they feel sustainability factors influence asset class returns, whether sustainability risks are incorporated into share prices in general, and so on. Next, an implementation approach can be determined, ensuring that the previously-determined beliefs align with the governance required for each approach.

The firm identifies a number of implementation strategies for various asset classes, including:

  • The Integration approach, which typically involves equity fund managers incorporating sustainability factors into investment analysis to identify risk and opportunities outside the limits of conventional analysis.
  • Sustainability-themed mandates, which, when included alongside core investments, could further diversify the portfolio and cushion against sudden shocks. Examples include climate change funds, “green” real estate funds and clean technology funds.
  • Engagement, a strategy that encourages shareholders to influence company management around ESG issues and affect the firm’s performance and future prospects.

“Many sustainable investment projects are able to keep up with or even outperform the market because they fall into so many diverse asset classes. However, each must be evaluated on its own merits according to investors’ investment philosophies,” said Sarah Cleveland, senior investment consultant at Watson Wyatt. “The smartest investors determine their capacity for risk before embarking on a sustainable investment strategy.”

For more information, please visit: www.watsonwyatt.com/sustainableinvestment.

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