toronto sustainability speaker series 9 october, 2012

© Matthew J. Kiernan© Matthew J. Kiernan11

Toronto Sustainability Speaker Series

9 October, 2012

Dr. Matthew J. KiernanChief Executive, Inflection Point

Capital [email protected]

Investing In A Sustainable

World


UN Staff Pension Fund: zero

World Bank Staff Pension Fund: zero

Nature Conservancy: zero

State of Connecticut: zero

Gates Foundation: zero

UN PRI: 1% - not 80%

What’s Wrong With This Picture?


ESG considerations are either immaterial or actually injurious to financial returns.

ESG considerations is, therefore, incompatible with fiduciary responsibility.

ESG research is inevitably more “wooly”, imprecise, and unreliable than mainstream investment research.

All ESG approaches and products are essentially the same: confusion and conflation of very different approaches.

Massive double standard: “sustainable” strategies have to work ALL of the time, or they’re discredited. Mainstream approaches generally work 30% of the time, but that’s O.K.

But it’s not really about investment risk at all; it’s about CAREER risk. Better to “fail conventionally”…

Why Is This Happening?

A series of cognitive impairments and

myths:


But There’s a New World

Order

Two Major Tectonic Shifts

• Demographic: global population growth, over 90% in GEMS;

• Economic: shift of the world’s economic centre of gravity to GEMS; stagnation and low growth in the mature economies

Secular Megatrends

• Increasing demand for and scarcity of raw materials

• Energy demand growth, especially in GEMS

• Increasing pressures on water availability and quality

• Growing demand for food and pressure on land resources and biodiversity

• Urbanization and infrastructure demand growth, particularly in GEMS

• Tightening regulatory and taxation regimes for pollution and climate change

• Changing consumer demographics (ie. 600m + middle class; BOP)

• Growing global healthcare burden (including Access to Medicine)

• Greater strain on transportation systemsNew Imperatives for

Corporate Competitive Advantage; New Skill Sets

and Capabilities


The new competitive environment


The Impact Accelerators

• Growing stakeholder influence

• Greater investor awareness

• New fiduciary paradigm

• Rising stakeholder expectations

• Greater information transparency

• Real-time global communications

Despite all this change, most money managers haven’t changed or examined their basic investment processes since 1980!


A Better Way Forward . . .

SAI

The new competitive environment for companies also requires new investment approaches.

NOT . . . SRI

NOT . . .ESG

NOT . . .CSR

NOT . . .RI

NOT even SI

But simply “SAI” – Strategically-Aware Investing


The SAI Investment

Thesis

Both the complexity and velocity of change in companies’ competitive environments are accelerating dramatically. New skills, capability, and mindsets will be required to compete successfully.

A series of powerful global megatrends is largely responsible for creating an entirely new set of ‘non-traditional’ risk and return drivers for companies. Our shorthand term for those factors is ‘sustainability’ factors.

In this emerging environment, there will be an unprecedented premium for the most innovative, agile, and forward-looking companies. Traditional financial analysis is of only limited use in helping investors identify those companies.

By contrast, companies’ ability to manage sustainability-drive risks and opportunities better than their competitors is proving to be an increasingly robust proxy and leading indicator for those new skills and capabilities.

The variations among company-specific exposures to these emerging, megatrends-driven risk/return factors varies considerably, even within the same industry sectors. Deltas can be 30 times or more.

Robust, institutional-quality sustainability research and analysis is actually extremely rare. Consequently, the substantial differences among companies’ risk and opportunity profiles driven by the emerging megatrends remain largely hidden from investors. This creates significant information inefficiencies and asymmetries which astute investors can exploit.

This “sustainability alpha premium” will become even greater going forward, as the secular global megatrends continue to bite deeper.

Successful, forward-looking investment strategies require integrating sustainability insights with more traditional fundamental and technical financial analysis – from the very outset. The sustainability component complements the other two by adding a perspective which is more forward-looking, and focused on “intangibles”.


Towards A More Robust Definition of Corporate

Sustainability . . .

Today, 75-80% of companies’ true risk profile and value potential lies below the surface, and cannot be captured by traditional financial analysis.BUT: Corporate sustainability is about MORE than “just” ESG

Models like this are necessary if investors want to find the future out-performing companies.


And, By the Way, the Jury

is IN!

The actual evidence linking superior company sustainability performance with financial returns is CONCLUSIVE:

Deutsche Bank: Analyzed over 100 academic studies, 56 research papers, and 4 meta studies in June 2012. Results:

100% academic studies found superior ESG performance = lower cost of capital (ie. Risk)

89% showed superior stock performance

85% showed superior profitability


Some Remedies . . .

Restore integrity of “investment food chain”: owners of the assets should be at the TOP!

Educate, train, and empower fund trustees

Educate the investment consultants

If your money managers or consultants are not ESG/SAI – savvy, fire them!

Create more symmetrical incentive structures to encourage innovation and experimentation

Radically restructure business and management education

Wait for the dinosaurs to retire . . .


Behavioural Finance 101: The 5 Stages

of Organizationa

l Self-Actualization


What’s Next? It’s

Up To YOU!

For more information, please contact

Dr. Matthew KiernanChairman & Chief

Executive

416-399-2861

[email protected]

www.inflectionpointcm.com

toronto sustainability speaker series 9 october, 2012

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