Matthew Kiernan, CEO of RiskMetrics Group, recounts a conversation he had in 1997 with the Chairman of a leading investment bank.

“I was told I was completely out of my mind. That it was completely illogical. That all the financial performance indicators ran in the other direction."

Kiernan has spent the last twenty-five years trying to convince fund managers that businesses that think sustainably are a good investment. But the resistance and outright hostility he's met with have left him feeling something of a heretic.

“For a nanosecond I was back on my heels. Who am I to argue with the chairman of Morgan Stanley? And then a light bulb went off in the recesses of my mind: he’s bluffing me. He has no idea what he’s talking about. He’s just parroting what he heard in the country club and what all of his peers reinforce: The Earth is Flat.”

The problem is that investors assume that factoring sustainability in their investment decisions locks them into an ethically shaped box that will damage returns. But Kiernan's approach is not traditional values based investment, in which whole sectors, from tobacco, to mining, to pornography, are excluded from your portfolio. Instead, he measures firms' ability to handle a range of environmental or social risks and opportunities. A well managed company, for instance, should be prepared for carbon pricing in some of its major markets.

"It's only when these non-traditional factors get internalised somehow that they become relevant to hard-assed investors. I've had senior executives with American companies as recently as a year ago saying 'climate change? a) it's not happening, and b) we'll never have regulation in the US'. But if your company is biggish; if you have operations in Europe or Scandinavia, you're already paying some kind of carbon tax."

But if companies can see the impact of climate change policies on their bottom line, why can’t investors? David Paterson, Head of Corporate Governance at the National Association of Pension Funds in the UK, admits there’s a lag.

“Companies have been driven by public opinion and legislation more than investors - and the reason is the way investors look at companies. In the short to medium term you don’t get more heavily rated by stock markets because you employed better business practices - its hard to put a value on that model because there isn’t a standard accounting practice.”

For Matthew Kiernan, standard accounting practices are part of the problem. "Every year 70% of active money managers underperform. And they actively defend their failure to know their net risk exposure [to sustainabiity factors].”

As he excoriates “spuriously self-confident consultants”, “smug money managers” and the "dated, ill-informed and unsophisticated understanding of sustainable investment" shown by even progressive funds such as the Gates Foundation, it's clear that Kiernan traces a direct link between Wall Street's hostility to sustainable investment and the sub-prime mess.

”It’s the social justice side of the equation that allowed us to raise questions about subprime that Wall Street didn't ask. Like ‘what's going on with US household incomes and their ability to afford these ratchets in payments’"

Kiernan hopes that a new intellectual humility on Wall Street, as well as changing attitudes to sustainability, may make the difference. The UN's Principles of Responsible Investment have so far gathered support from 500 signatories representing $18 trillion of assets. He describes US carbon regulation as "inevitable", and speaks admiringly of policies like the EU's Emissions Trading Scheme.

But if the smart investor just has to anticipate regulation, can that in itself bring about the deep cuts in carbon emissions that are needed? This is perhaps the biggest problem for Matthew Kiernan. If sustainable investing is all about risk and return, is it really about sustainability?

"A purist would argue that a sustainable mining company is an oxymoron. But back in the real world there's $60 trillion sloshing around trying to invest in something. If you think the only company eligible for that money is a solar-powered tofu manufacturer in Botswana, then that's an intellectually respectable position. But you've just given up any hope of influencing what goes on in the real world. I don't know if anybody is right or wrong, but it's a choice I made a long time ago that I would rather trade away purity for some impact."

And if Matthew Kiernan can move the trajectory of that $60 trillion by just a fraction, he’ll succeed in mobilising more capital for progressive purposes. Good news for investors, sustainable businesses and for the planet.

“Trying to get the first few converts is tantamount to trying to start a new world religion. The good news is that the lemming instinct on Wall Street and in the City is sufficiently well developed that once we get the first half dozen, the next 30 thousand will be a piece of cake.”

Victoria Crawford
Producer
CNBC