‘Sustainable investable themes’ was a concept developed by Citi to express the area of overlap between elements of sustainability and investment priorities. We defined them as ‘investment ideas that arise from, and are informed by, analysis of social or environmental factors’. We argued that they typically come about when markets fail to deliver environmental and/or social benefit; that they may present long-term risks to existing business models or create new models and that catalysts are often needed for the internalization (within prices) of environmental or social externalities.
The concept is best represented by this diagram. (This example focuses on the mining sector but the concept is equally applicable to other sectors.) SRI investors will be most interested in the social and environmental issues to be found on the fringes of financial materiality particularly if they can be shown to be moving in the direction of materiality.
In considering which issues are most relevant to investors, it is important to remember that an investor’s focus may be different from the internal priorities of a company. For example, while cost control may be an important priority for a given company, if an investor thinks that the market as a whole believes that the company will achieve its cost control objectives then the issue will be considered as ‘in the price’ and no longer worthy of the investors’ attention – even though it will remain an important priority for the company. Set against this is the fact that capital markets have, to date, paid so little attention to ‘sustainability’ issues that very few such issues can be said to be ‘in the price’ – making the whole area happy hunting ground for investors interested in sustainability.
It should also be remembered that, for the investor, the identification of the ‘sustainable investable theme’ is just one stage in a five stage process that tracks from sustainable development:
- Via issues – E.g. climate change, tax contribution, equal opportunity etc.
- Catalysts – E.g. renewables subsidy, Black Economic Empowerment.
- Themes – E.g. Auto manufacturers and responsible redundancy.
- Value drivers – E.g. growth in pension volumes from government encouragement of saving.
- Company responses and performance indicators – E.g. planned regasification capacity.
- To valuation
