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Environment Magazine September/October 2008


November-December 2015

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Wall Street Wakes Up: Sustainable Investment and Finance Going Mainstream

The pens slipped easily across the paper, about every eight minutes. At regular intervals, Heads of State entered the innermost sanctum and solemnly signed their names, committing their nations to the Framework Convention on Climate Change. The year, 1992. The place, the landmark United Nations Conference on Environment and Development, known as the “Earth Summit” at Rio de Janeiro. The outcome, a legally binding commitment from the industrialized nations to begin to reduce greenhouse gas emissions associated with climate change below 1990 levels by 2000, with a moral commitment from developing countries to join the effort at a later date according to their capacity. The success rate 25 years later—nearly zero.

I was in the room when those signatures hit the page, observing the procession of Heads of State with Jacques Cousteau, with whom I worked at the time as Vice-President for International Affairs and writer, and a film crew. In the weeks before the Rio Conference, we had made two visits to then President Bush at the Oval Office in the White House to urge him to attend the Rio conference and sign the climate change Convention, even though at the time he faced outright stiff opposition from his own vice-president, not to mention many Congressional and business leaders, to doing so. But, in the end, Bush went to Rio and signed the leather-bound Convention book, thus reaffirming U.S. leadership in the battle against climate change and other trends in environmental degradation. He was bold and it took political courage.

Rio was a heady time—nations had labored hard to come to some coherent conclusions and commitments to act. Of course, we now know that, relative to the 25 intervening years, progress has been feeble, even if, admittedly, the targets agreed to at Rio were essentially an idealistic shot in the dark and, as it turns out, quite unrealistic.

But weak progress does not stem from the original reduction targets per se—one must always aim high. Other unforeseen factors played a major role—first, how quickly the economies and thus emissions of China and India would grow; second, the degree to which the exemption of these two countries from taking reduction action on the same timeline as the developed countries would inflame U.S. legislators and provide a scapegoat to scuttle U.S. implementation U.S. ratification of the 1997 Kyoto Protocol, which was a key implementation tool for the Rio agreements; and third, the general absence of the mainstream investor community in the promotion of environmental issues at the time. The role that community could play in hastening reductions by shifting capital development toward “low carbon” activities was not integral to the evolving policy landscape. The field we now call sustainable investing, or socially responsible investing (SRI), was then nascent, with a few vanguard voices helping to advance thinking, such as Barbara Krumsiek, who recently retired as chief executive officer (CEO) of the Calvert Fund; Abby Joseph Cohen, senior investment strategist and president of the Global Markets Institute at Goldman Sachs; and Farha-Joyce Haboucha, who heads SRI for Rockefeller and Company. Over time, they and other pioneers made the case, but it was hard at the time to also prove that “good” investment practice would not lead to less investor return, let alone a premium return. The idea that climate change represented a hidden economic risk was a rarified concept, and a drumbeat of doubt on climate change science continued.

Nor was the now common term “ESG” investment (standing for use of environmental, social, and governance investment criteria) widely used. SRI and ESG were boutique efforts, struggling to prove the case that investors could maintain and increase value by pro-environment investment strategies—essentially investing capital in companies with a positive environmental record—avoiding pollution and acting responsibly. Meanwhile, reductions in greenhouse gas emissions (ghgs), the only measure of success that matters to the atmosphere, languished.

Investors are increasingly looking to technologies like electric cars.

Now, doubt of the science is merely political theater, and insurance companies are warning that they may be not be able to underwrite the costs of increasing extreme weather events that flood cities and knock out power. According to Richard Merbaum, executive vice-president of Willis Group Holdings, a major global risk advisor, insurance, and reinsurance broker, speaking at a spring 2015 seminar co-hosted by CDP and McGraw Hill Financial on new and emerging trends in environmental investing and sustainable finance, “In most cases, exposure to extreme natural catastrophes (the 1:100 year events) cannot today be fully covered by insurance.” Merbaum added, “Most companies have not adopted the modeling approaches of the insurance industry to fully assess their exposure to such events and to enhance their resilience to them.” Of the relationship between insurance risk and the financial services sector, he said, “The financial sector does not take adequate account of natural disaster risk. Investors do not factor it into their valuations and creditors do not systematically assess natural hazard risks against their loan books, and this includes real estate markets which largely ignore extreme event risk, regardless of the location.”1

China has experienced rapid growth since the United Nations Conference on Environment and Development, known as the “Earth Summit” at Rio de Janeiro.

As the world approaches COP-21, the 21st Conference of the Parties to the climate change convention—numbering didn't start right at 1992—nations and emitters are scrambling to keep up with the trajectory of emissions increase to try to hold inevitable temperature rise to two degrees Celsius by 2030. This is the current best estimate of when it will be too late to even think of managing impacts of the climate change that will by then have been unleashed by accumulating greenhouse gases in the atmosphere.

Some progress has been made, of course, but far too little, considering the thousands of person-hours spent in strategy sessions, conferences, and scenario building worldwide. Breakthroughs in renewable non-fossil-fuel energy have been astonishing, and implementation costs have fallen. But the approach is still somewhat scattershot and grab-bag and the critical step—a coherent well-funded low-carbon reindustrialization and reemployment initiative, including massive retooling of infrastructure—remains pragmatically elusive.

Earth's fragile atmosphere

But because one must live with hope, I try to synthesize evidence of what seems promising, and there is indeed new momentum in the investment field worldwide, among mainstream investors who have, at last, began to align their capital decisions with environmental imperatives more than ever before. What was once boutique is becoming generalized, with a quiet revolution taking place among investors and the financial services sector overall—a glimmer of hope that may trigger the needed pivotal shift in capital flow.

Worldwide, screening of assets with environmental, social, or governance parameters in mind is growing. Data are compelling. According to the 2014 report of the Global Sustainable Investing Review, in Europe, assets committed to ESG grew by 30% in USD (15.4 billion to $22 billion); in the United States, total US SRI assets grew by 76% in USD ($3.74 trillion to $6.57 trillion); in Canada, assets using responsible investing strategies grew by 60% in USD ($598 billion to $945 billion); in Australia and New Zealand, assets committed to ESG grew by 30% in USD ($6.6 billion to $22 billion); and in Asia, the overall market for sustainable investment grew by 32.5% ($40 billion to $53 billion).2

In the United States, according to the Sustainable Investment Forum (SIF) in its “Report on US Sustainable, Responsible and Impact Investing Trends, 2014,” assets now committed to ESG or SRI approaches represent one in six dollars invested, and the movement is catalyzed, as is most business, by customer and client demand.3 (p. 12) According to the SIF report, “Money managers increasingly are incorporating ESG factors into their investment analysis and portfolio construction, driven by the demand for ESG investing products from institutional and individual investors and by the mission and values of their management firms. Of the managers that responded to an information request about reasons for incorporating ESG, the highest percentage, 80 percent, cited client demand as their motivation.”3 (p. 15)

Bangkok, Thailand—November 5, 2011: Cars navigating through the flood on Phahonyothin Road.

Another key factor in growth has been new doability, that is, growth in number, scope, and size of new SRI investment vehicles being used across the financial services field. According to SIF, during 2012–2014, assets managed by institutional investment firms using ESG issues more than tripled, mostly involving public pension funds, foundations, and private endowments.3 (p. 14) Also according to the SIF report, assets involved in private equity and alternative investment funds considering ESG factors also grew dramatically, from 177 funds in 2010 with $37.8 billion in assets to 336 funds with $224 billion in assets in 2014, with a 70% increase in just the last two years.3 (p. 13)

And as products and practitioners proliferate, diverse approaches to bringing ESG values to bear are used, among them screening out investments that do not align with ESG values; screening in those that advance ESG values; rebalancing portfolios regularly with screening in mind; and proactive direct investment for specific results, such as direct investment in a particular clean technology company or a social enterprise.

Another key indicator worldwide is the steady growth in the number of signatories to CDP, formerly known as the Carbon Disclosure Project, on whose behalf CDP administers an annual disclosure request process with most public companies in the world. Annually, CDP gathers and synthesizes quantitative and qualitative information on environmental performance and ranks companies, and signatories have grown from 35 early adopters at CDP's inception in 2001 to 822 today. Most of the world's leading financial service sector enterprises are CDP signatories, and collectively they managing either directly or indirectly about $80 trillion in assets.4 This community of interest is made up of investors of all stripes and sizes, including Blackrock, the world's largest investment firm by assets managed, roughly $4.7 trillion, which announced this spring a new effort in impact investing to centralize and expand its $225 billion “values-based” investment focus, which will include environmental preferences as well.5

New momentum and increase in scope are also caused, paradoxically, by the passage of time. With time, it is harder to deny mounting evidence of risks and costs in the form of weather extremes, such as the flooding of Bangkok, Thailand, in 2011, which cost $3 billion in local losses alone, excluding damages and reconstruction,6 and other catastrophic events, such as the flooding of Lower Manhattan after Hurricane Sandy in 2012, which cost about $50 billion, according to a report by the National Hurricane Center.7 Such events represent significant economic risks, including the risk of insolvency, throughout the economy, including to investors, and all the more if climate change spurs such events to occur more often.

Also, as time passes, financial data can accumulate and infuse themselves through the financial services industry to help further overcome doubts. According to “Gateways to Impact,” a 2012 nationwide survey supported by Deutsche Bank, The Rockefeller Foundation, The Calvert Fund, and others, of 1065 financial advisors then managing client money, 50% of advisors surveyed felt sustainable investing had an insufficient track record or weak financial performance.8Accountants and financial managers work with hard numbers, not ambiguity, which is just as well, since when financial decisions do not rest on reliable fundamentals of finance, flimsy financial instruments can enter the market, a most egregious recent example of which were the mortgage-based instruments that rested on no solid capital or performance data and that caused the real estate bubble of 2008 and near economic collapse in the United States. But solid indicative data on environmental factors in investing have grown with time.

For example, Standard and Poor's, the venerable index company, has developed a whole suite of new indices related to environmental issues, including its “S&P Carbon Efficient Indices”: broad market index trackers that reward more carbon-efficient companies at the expense of less carbon-efficient ones within the same sectors; the S&P Green Bond Index and Green Project Bond Index, which “includes eco-friendly bond issues by sovereign, supranational and corporate issues”; the Clean Industry Indices, which focuses on “Investments in companies which are actively developing clean technologies such as wind, water, solar; and a fossil fuel index, in development, that will include “fossil fuel divestment strategies, exclude all heavily Fossil-Fuel dependent activities.”9

At the spring 2015 seminar co-hosted by CDP and McGraw Hill Financial, which owns Standard and Poor's (S&P), Alka Banerjee, Managing Director of Global Equity and Strategy Indices for S&P Dow Jones Indices, presented information that showed the relationship between the new S&P Energy Efficiency Index and the S&P 500, the index of 500 stocks chosen for market size, liquidity, and industry grouping, among other factors, designed to be a leading indicator of the performance of U.S. equities in large public companies.

The presentation, which reflects a decade of research and data gathering, made clear that the new Carbon Efficient Index is tracking with the S&P 500 “to a T,” Banerjee said at the seminar. What this means to the general public is that stocks that meet the Carbon Efficient criteria do as well financially as companies that do not, or, put another way, investing in carbon-efficient companies does not entail financial sacrifice according to data so far. To have that fact codified in an index financial benchmark is a true breakthrough in that it provides investors a credible and familiar indicator.

Similarly, Banerjee offered data that show close tracking between the Carbon Efficient indices and the S&P/IFCI index, which tracks performance in emerging markets (see Figure 1).

Of course, carbon efficiency is only one dimension of sustainable investing, and new more broad products are also appearing from large mainstream entities, such as the announcement in July 2015 at Addis Ababa and the UN Conference on Financing Development by BNY Mellon, another venerable financial institution founded by Alexander Hamilton and managing $1.7 trillion in assets. There, BNY Mellon announced a new initiative to bring social Finance investment initiative to scale to help spur and further what BNY Mellon estimates as the $22 trillion market, including SRI, impact investment, environmental finance, development finance, and microfinance, according to its White Paper, “Sustainable Finance at Scale: Creating Value for Investors.” BNY Mellon defines social finance as “any investment activity that generates financial returns and includes social or environmental impact.”10 (p. 2) The White Paper further states, “Across BNY Mellon business lines, our recommendations to bring social finance to scale are already guiding our own activities in product development, thought leadership, and partnerships. Company-wide product development is underway to meet clients' growing demand for engagement in the social finance field.”10 (p. 7)

According to John Buckley, Global Head of Corporate Social Responsibility at BNY Mellon, “We realize that global investment flows are a key resource in solving the world's most pressing problems, but it could also lead to business opportunities for our clients and firm. In a global world defined by rapid change, evolving risks and new opportunities, business cannot afford to focus only on short-term profits; we must make long-term investments that advance a stable, sustainable and inclusive global future.”11

And, of course, the hope is that as social investments become more profitable, they will help unlock or redirect investments toward more socially and environmentally beneficial activities to incentivize investment in new technologies, especially low carbon energy and updated energy infrastructure. Such a shift cannot come too soon. According to the International Energy Agency, which tracks energy trends, government and the private sector must spend $44 trillion on clean energy though 2050 if the world has any chance at all to hold temperature increased to two degrees Celsius by 2035.12 This need for funds can only be met by massive shifts in private capital flow.

At the more activist end of the investor spectrum, of course, is the divestment movement, spearheaded by Bill McKibben at, which is attracting its own momentum among investor entities, university endowments, and foundations such as the Rockefeller Brothers Fund (RBF). This year, the board of directors of RBF voted to remove all fossil fuel and tar sands holdings from its then roughly $800 million portfolio, separating itself from the original source of the Rockefeller family wealth—oil.13 Major universities that have also announced their intent to divest or avoid investments in fossil fuel extraction or products include Syracuse University, with a roughly $2 billion endowment, and Stanford University, with roughly $18 billion.14

Figure 1.  S&P U.S. Carbon Efficient Index Performance: Close Tracking of S&P 500

Of course, the ESG field remains complex and there is still widespread ambivalence among investors. According to “Sustainability Signals,” a February 2015 recent survey by Morgan Stanley Institute for Sustainable Investing, “Individual investors have a positive, but conflicted, view of sustainable investing: 71% of individual investors are interested in sustainable investing while 54% believe choosing between sustainability and financial gains is a trade-off.”15 (p. 1) For this latter group, data such as the tracking indicators of the new S&P indices may be edifying.

Solar energy is a source of potential clean energy investment.

Other critical findings concern the intergenerational and gender trends in demand for ESG investment products and approaches. According to the Morgan Stanley study, “Compared to the overall individual investor population, Millennial investors are nearly 2× more likely to invest in companies or funds that target specific social or environmental outcomes;” and “Female investors are nearly 2× as likely as male investors to consider both rate of return and positive impact when making an investment.”15 (p. 1)

This latter finding squares with the gender findings of the 2012 “Gateways to Impact” report. That study found that 59% of female advisors surveyed expressed interest in investments that “seek to provide financial returns and environmental and social benefits to your clients,” compared to 34% of male advisors surveyed.15 (p. 4)

Wind energy represents an opportunity for investors.

While it has become commonplace to use the shorthand term “carbon pollution” when referring to greenhouse gas emissions, the truth is that greenhouse gas emissions are more a universal by-product of traditional economic activity than classic pollutants such as arsenic and mercury, which were universally understood to be poison and emitted generally via neglect, outdated processes, or criminal intent. But in the 25 years since the Rio conference, reducing emissions has been difficult not only politically but technologically too, because fossil fuels cannot be neatly stripped out of economy activity like an unwanted stitch in a knitted scarf. Emissions have been woven into normal economic activities, especially in industrialized nations since World War II, and economic growth has been dependent upon greenhouse gas emissions, relatively low-cost fossil fuels, and energy waste.

Now, as financial data are strengthened and the science of climate change becomes definitive, investment that maintains the status quo and does not take ESG factors into account seems irresponsible and imprudent at the least.

Thus, we may be in the swirl of a radical and promising convergence of circumstances: we approach the scientific deadline—2030—in trying to stem the worst impacts of climate change, a new generation of investors is coming of age, new fortunes are being made among those younger investors, and women no doubt are moving up the ladder in their firms, which should help them further their preference for ESG approaches.

What seems certain is that a corner has been turned. According to the “Sustainable Signals” report, “65% of individual investors expect sustainable investing to become more prevalent in the next five years.”

Whether anecdotal, thematic, or ironclad, these trends are tantalizing. Now that ESG investing is headed mainstream, the question is, has the revolution that can create that pivotal shift in capital flow come too late, and will it last? The world does not have 25 more years in its pocket and there are no leather-bound signature books in the offing.


1. Richard Merbaum, remarks, “New and Emerging Trends in Environmental Investment and Sustainable Finance,” seminar co-hosted by CDP and McGraw Hill Financial, April 28, 2015.

2. 2014 Global Sustainable Investment Review, Global Sustainable Investment Alliance, pp. 3–4.

3. Report on US Sustainable Responsible and Impact Investing Trends, 2014, US SIF Foundation: The Forum for Sustainable and Responsible Investments.


5. “Blackrock Expanding Efforts on Impact Investing,” Investment News, February 9, 2015.

6. J. Fernquest, “Economic Cost of Flooding,” Bangkok Post, October 18, 2011.

7. E. Blake et al., Tropical Cyclone Report: Hurricane Sandy, National Hurricane Center, February 12, 2013, p. 1.

8. “Industry Survey of Financial Advisors on Sustainable and Impact Investing,” Gateways to Impact, June 2012, p. 2.

9. Alka Banerjee, remarks, “New and Emerging Trends in Environmental Investment and Sustainable Finance,” seminar co-hosted by CDP and McGraw Hill Financial, April 28, 2015.

10. Sustainable Finance at Scale: Creating Value for Investors, BNY Mellon White Paper, July 2015.

11. John Buckley, “An Enabling Environment for Business: Insights for Development,” BNY Newsroom, July 14, 2015

12. “Energy Technology Perspectives, 2014,” Executive Summary, International Energy Agency, 2014, p. 8,

13. Divestment Statement, RBF Fund, September 2014,


15. “Sustainable Signals,” Morgan Stanley Institute for Sustainable Investing, February 2015,

Paula DiPerna is a widely published author and global environmental policy expert. She is currently a special advisor to CDP and served formerly as president of the Joyce Foundation; president of the International Division of the Chicago Climate Exchange (CCX); and Vice-President for International Affairs for the Cousteau Society, for which the principal was environmental pioneer Jacques-Yves Cousteau.

S&P Dow Jones Indices LLC, a part of McGraw Hill Financial, is an independent provider of global indices, data and research and does not sponsor, endorse, sell or promote any investment product or make investment recommendations. Standard & Poor's® and S&P® are registered trademarks of Standard & Poor's Financial Services LLC, and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC.       

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