ABOUT THE SPEAKER
Chris McKnett - Sustainable investment champion
Chris McKnett helps institutional investors put money toward sustainable and socially-forward assets.

Why you should listen

At State Street Global Advisors, Chris McKnett thinks deeply about how large investors, like banks, pension funds and endowments, can put their money in the right places -- not just for better business, but for a better world. In his role as the head of State Street Global Advisors' Environmental, Social and Governance Investing (ESG), McKnett develops sustainable-strategic products and integrates sustainability thinking directly into the investment process.

More profile about the speaker
Chris McKnett | Speaker | TED.com
TED@State Street Boston

Chris McKnett: The investment logic for sustainability

Filmed:
1,108,917 views

Sustainability is pretty clearly one of the world's most important goals; but what groups can really make environmental progress in leaps and bounds? Chris McKnett makes the case that it's large institutional investors. He shows how strong financial data isn't enough, and reveals why investors need to look at a company's environmental, social and governance structures, too.
- Sustainable investment champion
Chris McKnett helps institutional investors put money toward sustainable and socially-forward assets. Full bio

Double-click the English transcript below to play the video.

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The world is changing
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in some really profound ways,
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and I worry that investors
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aren't paying enough attention
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to some of the biggest drivers of change,
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especially when it comes to sustainability.
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And by sustainability, I mean the really juicy things,
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like environmental and social issues
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and corporate governance.
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I think it's reckless to ignore these things,
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because doing so can jeopardize
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future long-term returns.
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And here's something that may surprise you:
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the balance of power to really influence sustainability
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rests with institutional investors,
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the large investors like pension funds,
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foundations and endowments.
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I believe that sustainable investing
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is less complicated than you think,
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better-performing than you believe,
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and more important than we can imagine.
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Let me remind you what we already know.
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We have a population that's both growing and aging;
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we have seven billion souls today
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heading to 10 billion
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at the end of the century;
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we consume natural resources
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faster than they can be replenished;
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and the emissions that are mainly responsible
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for climate change just keep increasing.
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Now clearly, these are
environmental and social issues,
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but that's not all.
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They're economic issues,
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and that makes them relevant
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to risk and return.
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And they are really complex
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and they can seem really far off,
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that the temptation may be to do this:
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bury our heads in the sand and not think about it.
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Resist this, if you can. Don't do this at home.
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(Laughter)
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But it makes me wonder
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if the investment rules of today
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are fit for purpose tomorrow.
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We know that investors,
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when they look at a company
and decide whether to invest,
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they look at financial data,
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metrics like sales growth, cash flow, market share,
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valuation -- you know, the really sexy stuff.
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And these things are fundamental, of course,
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but they're not enough.
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Investors should also look at performance metrics
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in what we call ESG:
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environment, social and governance.
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Environment includes energy consumption,
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water availability, waste and pollution,
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just making efficient uses of resources.
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Social includes human capital,
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things like employee engagement
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and innovation capacity,
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as well as supply chain management
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and labor rights and human rights.
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And governance relates to the oversight
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of companies by their boards and investors.
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See, I told you this is the really juicy stuff.
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But ESG is the measure of sustainability,
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and sustainable investing incorporates ESG factors
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with financial factors into the investment process.
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It means limiting future risk
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by minimizing harm to people and planet,
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and it means providing capital to users
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who deploy it towards productive
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and sustainable outcomes.
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So if sustainability matters financially today,
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and all signs indicate more tomorrow,
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is the private sector paying attention?
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Well, the really cool thing is that most CEOs are.
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They started to see sustainability
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not just as important but crucial to business success.
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About 80 percent of global CEOs
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see sustainability as the root to growth in innovation
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and leading to competitive advantage
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in their industries.
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But 93 percent see ESG as the future,
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or as important to the future of their business.
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So the views of CEOs are clear.
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There's tremendous opportunity in sustainability.
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So how are companies actually leveraging ESG
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to drive hard business results?
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One example is near and dear to our hearts.
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In 2012, State Street migrated 54 applications
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to the cloud environment,
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and we retired another 85.
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We virtualized our operating system environments,
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and we completed numerous automation projects.
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Now these initiatives create
a more mobile workplace,
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and they reduce our real estate footprint,
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and they yield savings of 23 million dollars
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in operating costs annually,
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and avoid the emissions
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of a 100,000 metric tons of carbon.
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That's the equivalent of taking 21,000 cars
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off the road.
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So awesome, right?
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Another example is Pentair.
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Pentair is a U.S. industrial conglomerate,
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and about a decade ago,
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they sold their core power tools business
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and reinvested those proceeds in a water business.
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That's a really big bet. Why did they do that?
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Well, with apologies to the Home Improvement fans,
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there's more growth in water than in power tools,
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and this company has their sights set
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on what they call "the new New World."
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That's four billion middle class people
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demanding food, energy and water.
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Now, you may be asking yourself,
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are these just isolated cases?
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I mean, come on, really?
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Do companies that take sustainability into account
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really do well financially?
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The answer that may surprise you is yes.
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The data shows that stocks
with better ESG performance
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perform just as well as others.
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In blue, we see the MSCI World.
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It's an index of large companies
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from developed markets across the world.
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And in gold, we see a subset of companies
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rated as having the best ESG performance.
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Over three plus years, no performance tradeoff.
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So that's okay, right? We want more. I want more.
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In some cases, there may be outperformance
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from ESG.
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In blue, we see the performance
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of the 500 largest global companies,
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and in gold, we see a subset of companies
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with best practice in climate change strategy
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and risk management.
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Now over almost eight years,
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they've outperformed by about two thirds.
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So yes, this is correlation. It's not causation.
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But it does illustrate that environmental leadership
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is compatible with good returns.
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So if the returns are the same or better
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and the planet benefits, wouldn't this be the norm?
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Are investors, particularly institutional investors,
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engaged?
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Well, some are,
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and a few are really at the vanguard.
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Hesta.
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Hesta is a retirement fund for health
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and community services employees in Australia,
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with assets of 22 billion [dollars].
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They believe that ESG has the potential
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to impact risks and returns,
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so incorporating it into the investment process
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is core to their duty
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to act in the best interest of fund members,
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core to their duty.
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You gotta love the Aussies, right?
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CalPERS is another example.
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CalPERS is the pension fund
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for public employees in California,
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and with assets of 244 billion [dollars],
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they are the second largest in the U.S.
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and the sixth largest in the world.
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Now, they're moving toward 100 percent
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sustainable investment
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by systematically integrated ESG
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across the entire fund.
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Why? They believe it's critical
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to superior long-term returns, full stop.
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In their own words, "long-term value creation
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requires the effective management
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of three forms of capital:
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financial, human, and physical.
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This is why we are concerned with ESG."
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Now, I do speak to a lot of investors
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as part of my job,
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and not all of them see it this way.
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Often I hear, "We are required to maximize returns,
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so we don't do that here,"
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or, "We don't want to use the portfolio
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to make policy statements."
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The one that just really gets under my skin is,
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"If you want to do something about that,
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just make money, give the profits to charities."
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It's eyes rolling, eyes rolling.
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I mean, let me clarify something right here.
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Companies and investors are not
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singularly responsible for the fate of the planet.
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They don't have indefinite social obligations,
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and prudent investing and finance theory
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aren't subordinate to sustainability.
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They're compatible.
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So I'm not talking about tradeoffs here.
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But institutional investors
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are the x-factor in sustainability.
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Why do they hold the key?
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The answer, quite simply, is, they have the money.
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(Laughter)
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A lot of it.
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I mean, a really lot of it.
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The global stock market is worth 55 trillion dollars.
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The global bond market, 78 trillion.
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That's 133 trillion combined.
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That's eight and a half times the GDP of the U.S.
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That's the world's largest economy.
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That's some serious freaking firepower.
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So we can reconsider
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some of these pressing challenges,
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like fresh water, clean air,
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feeding 10 billion mouths,
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if institutional investors
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integrated ESG into investment.
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What if they used that firepower
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to allocate more of their capital
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to companies working the hardest
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at solving these challenges
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or at least not exacerbating them?
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What if we work and save and invest,
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only to find that the world we retire into
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is more stressed and less secure than it is now?
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What if there isn't enough clean air and fresh water?
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Now a fair question might be,
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what if all this sustainability risk stuff
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is exaggerated, overstated, it's not urgent,
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something for virtuous consumers
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or lifestyle choice?
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Well, President John F. Kennedy said something
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about this that is just spot on:
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"There are risks and costs to a program of action,
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but they are far less than the long-range risks
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and costs of comfortable inaction."
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I can appreciate that there is estimation risk in this,
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but since this is based on
widespread scientific consensus,
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the odds that it's not completely wrong
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are better than the odds
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that our house will burn down
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or we'll get in a car accident.
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Well, maybe not if you live in Boston. (Laughter)
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But my point is that we buy insurance
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to protect ourselves financially
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in case those things happen, right?
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So by investing sustainably
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we're doing two things.
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We're creating insurance,
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reducing the risk to our planet and to our economy,
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and at the same time, in the short term,
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we're not sacrificing performance.
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[Man in comic: "What if it's a big hoax
and we create a better world for nothing?"]
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Good, you like it. I like it too.
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(Laughter)
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I like it because it pokes fun
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at both sides of the climate change issue.
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I bet you can't guess which side I'm on.
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But what I really like about it
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is that it reminds me of something Mark Twain said,
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which is, "Plan for the future,
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because that's where you're going to spend
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the rest of your life."
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Thank you.
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(Applause)
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ABOUT THE SPEAKER
Chris McKnett - Sustainable investment champion
Chris McKnett helps institutional investors put money toward sustainable and socially-forward assets.

Why you should listen

At State Street Global Advisors, Chris McKnett thinks deeply about how large investors, like banks, pension funds and endowments, can put their money in the right places -- not just for better business, but for a better world. In his role as the head of State Street Global Advisors' Environmental, Social and Governance Investing (ESG), McKnett develops sustainable-strategic products and integrates sustainability thinking directly into the investment process.

More profile about the speaker
Chris McKnett | Speaker | TED.com