What the Future May Hold for Investors

What does the long term hold for investors in the chemical industry? Given the clear nature of how the industry has value at stake on social and environmental issues and the fiduciary duty of those acting on behalf of most institutional investors to explore all issues that materially affect value, it is not difficult to imagine a setting in which a thorough examination of these issues was ordinary investment practice. This analysis would take the form of integrating social and environmental issues into existing financial analysis as a normal part of discharging one's fiduciary duty. The precursors of this are already observable among investors such as Hermes, mentioned above.

The climate change actions led by some large public pension funds and state treasuries in the United States could well be the beginning of a sea change. If their actions are successful financially, this approach could expand to a much larger universe of investors across a more expansive range of sustainability issues.

This could fuel a rapid expansion of the product offerings based on integrating social and environmental issues into investment decisions. As noted above, this is already a growing segment, but off a relatively small base. Overall, several of the "best-in-class" funds have sufficiently long track records of good performance to remove some of the standard barriers to attracting institutional investment.

There is also a maturation of the analytical techniques investors can use to integrate sustainability considerations into their established investment practices. While there are many possible alternatives, the work of the World Resources Institute on a technique built around conventional tools of financial analysis is quite promising (Repetto and Austin, 2000; Austin and Sauer, 2002; Austin et al., 2003).

It is instructive to note related changes elsewhere in the financial services sector that appear to confirm the trends in the investment industry. The Equator Principles in commercial banking are the first industry-wide effort to establish standards for how to apply an understanding of social and environmental issues to providing credit. Likewise, action by some leaders in the reinsurance industry such as Swiss Re and Munich Re on the risks associated with climate change may well foretell a broader pattern in considering these issues in insurance underwriting.

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