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The world is changing
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in some really profound ways,
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and I worry that investors
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aren't paying enough attention
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to some of the biggest drivers of change,
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especially when it comes to sustainability.
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And by sustainability, I mean the really juicy things,
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like environmental and social issues
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and corporate governance.
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I think it's reckless to ignore these things,
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because doing so can jeopardize
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future long-term returns.
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And here's something that may surprise you:
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the balance of power to really influence sustainability
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rests with institutional investors,
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the large investors like pension funds,
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foundations and endowments.
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I believe that sustainable investing
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is less complicated than you think,
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better-performing than you believe,
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and more important than we can imagine.
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Let me remind you what we already know.
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We have a population that's both growing and aging;
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we have seven billion souls today
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heading to 10 billion
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at the end of the century;
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we consume natural resources
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faster than they can be replenished;
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and the emissions that are mainly responsible
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for climate change just keep increasing.
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Now clearly, these are
environmental and social issues,
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but that's not all.
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They're economic issues,
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and that makes them relevant
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to risk and return.
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And they are really complex
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and they can seem really far off,
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that the temptation may be to do this:
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bury our heads in the sand and not think about it.
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Resist this, if you can. Don't do this at home.
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(Laughter)
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But it makes me wonder
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if the investment rules of today
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are fit for purpose tomorrow.
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We know that investors,
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when they look at a company
and decide whether to invest,
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they look at financial data,
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metrics like sales growth, cash flow, market share,
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valuation -- you know, the really sexy stuff.
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And these things are fundamental, of course,
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but they're not enough.
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Investors should also look at performance metrics
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in what we call ESG:
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environment, social and governance.
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Environment includes energy consumption,
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water availability, waste and pollution,
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just making efficient uses of resources.
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Social includes human capital,
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things like employee engagement
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and innovation capacity,
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as well as supply chain management
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and labor rights and human rights.
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And governance relates to the oversight
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of companies by their boards and investors.
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See, I told you this is the really juicy stuff.
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But ESG is the measure of sustainability,
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and sustainable investing incorporates ESG factors
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with financial factors into the investment process.
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It means limiting future risk
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by minimizing harm to people and planet,
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and it means providing capital to users
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who deploy it towards productive
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and sustainable outcomes.
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So if sustainability matters financially today,
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and all signs indicate more tomorrow,
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is the private sector paying attention?
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Well, the really cool thing is that most CEOs are.
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They started to see sustainability
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not just as important but crucial to business success.
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About 80 percent of global CEOs
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see sustainability as the root to growth in innovation
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and leading to competitive advantage
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in their industries.
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But 93 percent see ESG as the future,
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or as important to the future of their business.
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So the views of CEOs are clear.
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There's tremendous opportunity in sustainability.
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So how are companies actually leveraging ESG
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to drive hard business results?
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One example is near and dear to our hearts.
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In 2012, State Street migrated 54 applications
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to the cloud environment,
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and we retired another 85.
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We virtualized our operating system environments,
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and we completed numerous automation projects.
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Now these initiatives create
a more mobile workplace,
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and they reduce our real estate footprint,
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and they yield savings of 23 million dollars
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in operating costs annually,
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and avoid the emissions
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of a 100,000 metric tons of carbon.
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That's the equivalent of taking 21,000 cars
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off the road.
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So awesome, right?
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Another example is Pentair.
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Pentair is a U.S. industrial conglomerate,
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and about a decade ago,
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they sold their core power tools business
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and reinvested those proceeds in a water business.
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That's a really big bet. Why did they do that?
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Well, with apologies to the Home Improvement fans,
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there's more growth in water than in power tools,
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and this company has their sights set
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on what they call "the new New World."
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That's four billion middle class people
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demanding food, energy and water.
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Now, you may be asking yourself,
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are these just isolated cases?
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I mean, come on, really?
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Do companies that take sustainability into account
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really do well financially?
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The answer that may surprise you is yes.
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The data shows that stocks
with better ESG performance
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perform just as well as others.
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In blue, we see the MSCI World.
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It's an index of large companies
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from developed markets across the world.
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And in gold, we see a subset of companies
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rated as having the best ESG performance.
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Over three plus years, no performance tradeoff.
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So that's okay, right? We want more. I want more.
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In some cases, there may be outperformance
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from ESG.
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In blue, we see the performance
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of the 500 largest global companies,
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and in gold, we see a subset of companies
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with best practice in climate change strategy
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and risk management.
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Now over almost eight years,
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they've outperformed by about two thirds.
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So yes, this is correlation. It's not causation.
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But it does illustrate that environmental leadership
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is compatible with good returns.
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So if the returns are the same or better
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and the planet benefits, wouldn't this be the norm?
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Are investors, particularly institutional investors,
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engaged?
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Well, some are,
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and a few are really at the vanguard.
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Hesta.
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Hesta is a retirement fund for health
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and community services employees in Australia,
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with assets of 22 billion [dollars].
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They believe that ESG has the potential
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to impact risks and returns,
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so incorporating it into the investment process
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is core to their duty
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to act in the best interest of fund members,
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core to their duty.
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You gotta love the Aussies, right?
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CalPERS is another example.
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CalPERS is the pension fund
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for public employees in California,
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and with assets of 244 billion [dollars],
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they are the second largest in the U.S.
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and the sixth largest in the world.
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Now, they're moving toward 100 percent
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sustainable investment
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by systematically integrated ESG
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across the entire fund.
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Why? They believe it's critical
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to superior long-term returns, full stop.
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In their own words, "long-term value creation
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requires the effective management
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of three forms of capital:
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financial, human, and physical.
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This is why we are concerned with ESG."
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Now, I do speak to a lot of investors
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as part of my job,
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and not all of them see it this way.
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Often I hear, "We are required to maximize returns,
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so we don't do that here,"
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or, "We don't want to use the portfolio
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to make policy statements."
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The one that just really gets under my skin is,
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"If you want to do something about that,
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just make money, give the profits to charities."
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It's eyes rolling, eyes rolling.
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I mean, let me clarify something right here.
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Companies and investors are not
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singularly responsible for the fate of the planet.
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They don't have indefinite social obligations,
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and prudent investing and finance theory
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aren't subordinate to sustainability.
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They're compatible.
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So I'm not talking about tradeoffs here.
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But institutional investors
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are the x-factor in sustainability.
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Why do they hold the key?
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The answer, quite simply, is, they have the money.
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(Laughter)
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A lot of it.
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I mean, a really lot of it.
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The global stock market is worth 55 trillion dollars.
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The global bond market, 78 trillion.
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That's 133 trillion combined.
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That's eight and a half times the GDP of the U.S.
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That's the world's largest economy.
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That's some serious freaking firepower.
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So we can reconsider
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some of these pressing challenges,
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like fresh water, clean air,
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feeding 10 billion mouths,
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if institutional investors
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integrated ESG into investment.
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What if they used that firepower
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to allocate more of their capital
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to companies working the hardest
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at solving these challenges
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or at least not exacerbating them?
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What if we work and save and invest,
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only to find that the world we retire into
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is more stressed and less secure than it is now?
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What if there isn't enough clean air and fresh water?
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Now a fair question might be,
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what if all this sustainability risk stuff
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is exaggerated, overstated, it's not urgent,
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something for virtuous consumers
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or lifestyle choice?
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Well, President John F. Kennedy said something
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about this that is just spot on:
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"There are risks and costs to a program of action,
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but they are far less than the long-range risks
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and costs of comfortable inaction."
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I can appreciate that there is estimation risk in this,
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but since this is based on
widespread scientific consensus,
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the odds that it's not completely wrong
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are better than the odds
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that our house will burn down
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or we'll get in a car accident.
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Well, maybe not if you live in Boston. (Laughter)
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But my point is that we buy insurance
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to protect ourselves financially
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in case those things happen, right?
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So by investing sustainably
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we're doing two things.
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We're creating insurance,
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reducing the risk to our planet and to our economy,
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and at the same time, in the short term,
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we're not sacrificing performance.
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[Man in comic: "What if it's a big hoax
and we create a better world for nothing?"]
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Good, you like it. I like it too.
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(Laughter)
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I like it because it pokes fun
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at both sides of the climate change issue.
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I bet you can't guess which side I'm on.
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But what I really like about it
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is that it reminds me of something Mark Twain said,
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which is, "Plan for the future,
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because that's where you're going to spend
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the rest of your life."
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Thank you.
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(Applause)
