HomeOur thoughts'Mainstream' investors will never understand sustainability …

‘Mainstream’ investors will never understand sustainability …

… until sustainable investment / ESG analysts learn speak their language … PROPERLY!

For decades now, sustainability advocates have tried to engage ‘mainstream’ investors with sustainability topics by co-opting investment concepts (such as ‘ratings’ and ‘analytics’) and adopting quasi-financial language (like ‘risk’ and ‘liability’).

It has sort of worked … but not really.

  • ‘Sort of’ – witness the growth of sustainable investment / ESG globally
  • ‘Not really’ – witness the lack of progress made in allocating capital to fix urgent sustainability problems

The ‘language’ metaphor helps explain this, in many cases sustainable investment analysts:

  • have learned the VOCABULARY of investment but …
  • have not learned the GRAMMAR of investment

It’s the grammar (the fundamentals of accounting, modelling and valuation) that enable analysts to put the words and numbers together in a way that makes sense and allow (investment conclusions to be drawn).

Because of this, we are able to get into the product development and marketing and policy making and corporate governance activities of asset management firms … but we often fail to get into the heads of the investment decision-making analysts and portfolio managers.  Approximations and associations about ‘reputational risk’ or ‘supply chain risks’ are simply not good enough in the face of an investment analyst with a robust valuation model in front of them.  “You say ‘risk’ but I say USD284m in FY2021, USD 290 m in FY2022 and USD 320m in FY2023”.

(Actually, if – as a sustainable investment analyst – you ever find yourself using the word ‘risk’, stop!  Ask yourself ‘what likelihood’ of an event of ‘what magnitude’ landing where on the financials of this company? … and articulate that instead).

“If we could find a way to get inside each other’s mind, uh huh”

Elvis (and many others on the same theme) are right: To convince financial analysts that sustainability factors should influence capital allocation, sustainability analysts need to stop taking shortcuts and learn how to ‘speak financial’ properly.  We need to learn the basics of accounting, modelling and valuation.

This is what SITA’s Financial Analysis, Modelling and Valuation course does.  It equips sustainable investment / ESG analysts to understand fundamental investment analysis and enable them to engage with and influence the ‘mainstream’ investment debate.

Only a mile

But Elvis only tells us to walk a ‘mile in others’ shoes … not a marathon.

Not every sustainable investment analyst needs to be able to construct valuation models from scratch – nor does every analyst need to be able to account for pension liabilities, to construct the DCF, to calculate beta or determine the fade period.

… but every sustainable investment analyst does need to understand what these things are and how they contribute to an investment valuation and thence to stock prices.

When sustainable investment analysts can position sustainability factors alongside all of the other factors that might affect a stock’s valuation, capital will be allocated accordingly.  Until we do this, no amount of bluffing about ‘reputational risk’ is going to achieve this.

“It takes two … babeeeaya”

Of course, as Tina and Rod remind us, that the onus should not only lie with the sustainable investment analysts.  The ‘mainstream analysts’ also have to do their bit.  So, SITA offers a sister course (Sustainable Investment Integration) teaches ‘mainstream’ investment analysts how to use sustainability factors in their valuation and investment decision-making.

… but …

“No!  Let me stop you right there.  There is no shortcut!”

All forms of investment and investment analysis are ultimately derivative of fundamental active investment.  Passive investment depends on fundamental active investment to find prices.  Quants investment depends on fundamental active investment for past data and price finding.  Portfolio analytics depend on analysis driving investment decisions that create portfolios.

There is nothing wrong with derivative strategies … unless they are being followed without a clear understanding of the fundamentals beneath them … as financial history has shown repeatedly.

It would be horribly ironic (not to mention an environmental and social catastrophe) if SRI/ESG strategies that pride themselves on paying attention to real world impact allow themselves to become overly focused on derivative strategies rather than the fundamentals.

Now is the time to ensure that you and your team are grounded in financial reality and to get the training you need for this.

Mike Tyrrell
Mike Tyrrell has 20 years experience in sustainable investment with positions at Jupiter Asset Management, HSBC Global Equities and Citi Investment Research​ Ranked #1 for sustainable investment research in the Extel Survey throughout this period. ​He launched www.sri-connect.com in 2009 - the sustainable investment industry's online global research network which he know manages. ​ Mike has widespread experience of training on sustainable investment including delivery of training courses for sell-side, buy-side and corporate clients. ​

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