Investing In A
Sustainable
World
Toronto Sustainability Speaker Series
9 October, 2012
Dr. Matthew J. Kiernan
Chief Executive, Inflection Point Capital
Management
mjk@inflectionpointcm.com
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© Matthew J. Kiernan
 UN Staff Pension Fund: zero
What’s Wrong
With This Picture?
 World Bank Staff Pension Fund: zero
 Nature Conservancy: zero
 State of Connecticut: zero
 Gates Foundation: zero
 UN PRI: 1% - not 80%
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 ESG considerations are either immaterial or actually injurious
to financial returns.
 ESG considerations is, therefore, incompatible with fiduciary
responsibility.
Why Is This
Happening?
 ESG research is inevitably more “wooly”, imprecise, and
unreliable than mainstream investment research.
A series of cognitive All ESG approaches and products are essentially the same:
impairments and myths: 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”…
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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
But There’s a New
World Order
• 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 systems
New Imperatives for Corporate
Competitive Advantage; New Skill
Sets and Capabilities
© Matthew J. Kiernan
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The new
competitive
environment
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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!
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© Matthew J. Kiernan
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
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 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.
The SAI
Investment
Thesis
 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”.
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© Matthew J. Kiernan
Today, 75-80% of companies’ true risk profile and value
potential lies below the surface, and cannot be captured by
traditional financial analysis.
Towards A More
Robust Definition
of Corporate
Sustainability . . .
BUT: Corporate
sustainability is
about MORE than
“just” ESG
Models like this are necessary if investors want to find
the future out-performing companies.
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© Matthew J. Kiernan
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
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© Matthew J. Kiernan
 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
Some Remedies . . .
 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 . . .
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Behavioural
Finance 101: The
5 Stages of
Organizational
SelfActualization
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For more information, please contact
What’s Next?
It’s Up To
YOU!
Dr. Matthew Kiernan
Chairman & Chief Executive
416-399-2861
mjk@inflectionpointcm.com
www.inflectionpointcm.com
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Further reading
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