Kristen Kleiman, The Climate Trust
November 28, 2016
I am new to the world of sustainable investments. For the last 25 years, before joining The Climate Trust, my career was centered almost exclusively on timberland investing. The corollaries between sustainable and timberland investing may not be apparent at first, but U.S. timberland investing is based almost entirely on sustainable forestry. In fact, most U.S. timberland companies manage their assets under either the Sustainable Forestry Initiative (SFI), or Forest Stewardship Council (FSC) criteria.
Surprisingly, sustainability isn’t timberland investing’s greatest selling point. Instead, the industry does an excellent job of touting timberland’s positive role in a diversified portfolio. Timberland investment management organizations (TIMOs, as they are now called) rarely call out the environmental benefits of the asset class. Instead, they focus on investment fundamentals that portfolio managers focus on: preservation of capital, inflation hedging, and non-correlation with other asset classes. There are lessons to be learned here—from its beginnings in the 1980’s to 2010, TIMO’s grew from $1 billion to over $50 billion of assets under management (Timber Investment Resource LLC. Timberland Primer 2012).
The first major takeaway—Labels Matter. Agreement on what our industry calls itself may seem inconsequential, but investors appreciate clear naming conventions for ease of performing asset allocation. Back in the late 1990’s when I was marketing timberland, this was a real challenge. I had prospective investors ask me: where does timber belong in my portfolio: real estate, private equity, alternatives? Some even tried to lump timber in with oil and gas! Twenty years later, it is pretty easy to find timber as its own separate asset allocation (which was the industry’s ultimate goal).
Why does this matter? Like the old adage, “you can’t manage what you don’t measure,” one could argue, “you can’t market what you don’t label.” Sustainable investing (and I use that term tentatively) can’t seem to agree what it should be called: impact investing, socially responsible investing, conservation investing, green investing? And if the industry can’t even agree on its name, a message is sent that we are still too disorganized to warrant serious attention from institutional investors.
Like the TIMO’s of the 1990’s, the goal should be to convince institutional investors that sustainable investments belong in their portfolios—leading to the allocation of a small percentage to the asset class. If the industry can achieve that, the numbers become big very quickly. According to the National Association of College and University Business Officers, in 2015 there were 96 university endowments in the U.S. with assets ranging from $35 billion to $1 billion. And, according to the actuarial consultancy, Milman, the top 100 U.S. pension funds had $3.4 trillion in assets in 2015. Even a small percentage of these institutional investors is a huge number. For example, a $25 billion pension fund allocation of 1% to sustainable investing would be $250 million.
So the industry has a label problem, which means it could have an asset allocation problem. To address this situation, we have to figure out what to call this new asset class. The sector spans a wide range of issues, including: climate change mitigation, poverty alleviation, renewable energy, access to finance, land and species conservation, and affordable housing. Perhaps we need to split them along different lines—lumping environmental-related investing into the broad “sustainable investing” category; and poverty, education, and affordable housing into “social finance”? Any way you slice it, this nagging problem requires a solution before we are able to progress.
Major takeaway number two—Risk Matters. Since the Great Recession, portfolio managers have increasingly focused on risk management and mitigation. TIMO’s understood this early. Timberland was initially marketed with 8-12% nominal (includes inflation) projected returns, with little track record to call on. Those projections were about the same return as a long-term investment in the S&P 500. Not terribly compelling. But instead of trying to compete with heady projections of private equity and venture capital, TIMO’s set themselves apart by showing that timberland investments reduce portfolio risk without reducing overall portfolio returns. Portfolio managers were convinced and started investing. And the icing on the cake was that during that first 20-year period, many TIMO’s beat those projected returns by a long shot.
Our industry should convince portfolio managers that investing in the sustainable asset class is less risky to their portfolio than not investing—but we have to prove it first. Does sustainable investing actually de-risk a diversified portfolio of traditional assets? It certainly would seem so, given the work done by corporations to track their sustainability. But by focusing on the portfolio, and not just individual companies in the portfolio, sustainable investing could be seen as essential to portfolio risk management.
The third major takeaway—Right Language. Timberland investing wisely uses traditional investment language to describe the asset class. This follows logically from addressing risk. Concepts like efficient frontier analysis, correlations between sustainable investing and traditional asset classes, and inflation hedging, need to be explored and explained.
Another component of right language is to keep the message positive and avoid speaking out against the competition. In the early years of timberland investing, there seemed to be an unwritten rule that you talk up the asset class, and don’t talk down the competition. All parties focused on educating investors about the benefits of timberland to their portfolios—it didn’t make any sense to belittle other timberland managers. As a whole, we wanted to build the asset class first and foremost. As the industry matured, competition heated up, but in the early days we were all in it together.
As Climate Trust Capital (an independent firm of The Climate Trust) launches its own funds, educating potential investors on these issues will take on a particular urgency. The required funding needed to support the low-carbon transition, and arrest temperature changes, is estimated to be $4.8 trillion according to the 2015 report, “Banks and Climate Change Impact.” Our global wellbeing demands this maturing of sustainable investments—and given the particularly dire climate news of late, it must happen rapidly.
The lessons learned in bringing an asset class from infancy to maturity are many, but if 25 years have taught me anything, it’s that positioning is everything. We need to talk the right talk to move sustainable investments from the fringe to the forefront—where they belong.
Image credit: Flickr/NRCS Oregon
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