Human ingenuity has, over the centuries, created our extraordinary global economy. Technological progress affords the average citizen of highly developed (i.e., G7) economies a standard of comfort unavailable to even the wealthiest mere decades ago. And the market satisfies evolving consumer wants and needs with supply chains that move people, capital, goods, and services across borders at ever-quickening paces. People around the world are now clamoring to join the middle class. But academics, policy makers, and leaders in the business and investment communities are increasingly realizing that enabling those lifestyles without significant changes in our production systems could risk our planet’s ability to support us.
As those billions express their aspirations to join the integrated global economy, we who have already enjoyed the fruits of progress must set our sights higher still: ensuring that future economic growth is sustainable and meets “the needs of the present without compromising the ability of future generations to meet their own needs.” Delivering the sustainable economic growth necessary to enable those global citizens to participate fully in a stable, middle-class lifestyle is not a pipe dream, but it will require long-term vision from the economic leaders of today.
Fortunately, both asset owners (that is, providers of investment capital), investment managers, and corporate decision makers have realized that sustainability is a critical consideration in planning for the future.
Asset owners, particularly Millennials, aspire to invest their savings in a way that fulfills their values while earning the return that will enable them to achieve the things all savers want: to pay for their children’s education, fund their retirement, and build a nest-egg for their other needs. Responding to this demand, investors have begun shifting considerable assets into sustainably driven strategies. In 2014 more than one out of six (18%) of investment dollars in US equities were devoted to sustainable strategies, doubling the percentage from only a few years prior.
Corporate leaders also aspire to devote resources to those aspects of their business that will build long-term value. They increasingly recognize that sustainability is not an afterthought, but rather is integral to their business. In McKinsey’s 2014 Global Survey on Sustainability, the percentage of CEOs who made sustainability their #1 priority has gone from 3% to 13% since 2010. Further, 43% of responding organizations address sustainability because it “Aligns with company business goals, mission, or values,” more than double the percentage from 2010 (21%).
However, investors and senior management still lack the tools to fully integrate sustainability into their investing and management activities. Business leaders properly have the sense that capital investments in sustainability issues may not yield results and investors have seen mixed outcomes from values-driven investing. Recent work at Harvard Business School used SASB’s industry-specific methodology to reveal that the materiality of those sustainability efforts provides the missing piece of the puzzle.
In HBS working paper 15-073 “Corporate Sustainability: First Evidence on Materiality (2015),” Mozaffar Kahn, George Serafeim, and Aaron Yoon applied the SASB methodology (controlling for Fama-French and industry effects) to 45 industries across 6 sectors and showed significant outperformance, in both market returns, and revenue and income growth, to companies that properly distinguish between material and immaterial issues and invest only in the former. In a forthcoming follow-up paper, “Shareholder Activism on Sustainability Issues,” Jody Grewal, Serafeim and Yoon suggest that shareholder proposals on material issues lead to improved performance while those related to immaterial issues may actually be value-destroying to the extent that they push management to devote resources (capital, etc.) inefficiently to sustainability projects that don’t impact business outcomes.
SASB, the Sustainability Accounting Standards Board, has developed standards and metrics for companies to report on only those sustainability issues that are material to investors, and for investors to get the decision-useful information they need to draw meaningful conclusions around performance on these critical issues. Focusing on materiality aligns the aspirations of investors to allocate capital to organizations that meet their criteria for sustainability with those of business leaders to build companies that create long-term value, thereby maximizing the chances of fulfilling the aspirations of emerging consumers to participate fully in global wealth.
Michael Kinstlick is the Head of Standards Setting Organization for the Sustainability Accounting Standards Board. He oversees research, analytics, consultation, and codification and maintenance of the SASB standards.
 82% of HNW Millennials (vs 45% HNW overall) are interested in sustainable investing. (“Investing in the Future: Sustainable, Responsible and Impact Investing Trends,” Morgan Stanley Wealth Management, April 2016: http://www.morganstanley.com/ideas/sustainable-investing-trends] See also: “Rise of the Millennials (and the impact on values-based investing)” from Standard Life, October 2015: http://www.standardlifeinvestments.com/WP_Rise_of_the_Millennials/getLatest.pdf
 Forum for Sustainable Investing.
 McKinsey Global Survey on Sustainability 2014: http://www.mckinsey.com/business-functions/sustainability-and-resource-productivity/our-insights/sustainabilitys-strategic-worth-mckinsey-global-survey-results