In 2016, Cooperstown, NY decided to move its pension money to a State Street S&P fund that excluded coal, oil, and gas producers:
The result was a sustainable investing debate that now seems a bit blurry.
One side said the new investing philosophy would save humanity. The opposing group believed their fiduciary duty is the highest return. On one side we had the planet. On the other, the well-being of the Cooperstown police and firefighters.
Actually though, the dividing line is not quite that clear.
Investors have begun to look at the upside of sustainable investing. But not because it does good by supporting companies that preserve the environment. Their reasons do not focus on cutting emissions and boosting corporate ethics.
Instead, they say the value of an investment will decline because firms will have to pay for the cost of their behavior. Tobacco companies have lower profits because they need to offset the harm from nicotine. Industrial firms will have the expense of cleaning up the pollution they create.
When profits fall, so too can share prices. Previously attractive investments will lose their glamour. This all means that sustainable investing might be about more than preserving the planet. It can also be about preserving profits.
One British fund manager showed us which firms’ value would suffer from ignoring sustainability. Below you can see that for tobacco and aerospace/defense, negative social value will hugely depress market value:
Our Bottom Line: Negative Externalities
Companies create negative externalities when they pollute the air or sell unhealthy products. As a result, society bears the cost of their behavior until they have to clean it up. But then, production becomes more expensive and supply decreases.
Seeing supply decrease, the sustainable investors in Cooperstown might say, “We too can elevate our return.” (But I could not be sure. Nowhere could I find an update on the village’s investing.)