Notwithstanding a global coronavirus pandemic, a looming recession, and escalating protests against racial injustice, the hottest topic for investment leaders in mid-2020 is the same as it was at the start of the year: sustainability. 

Hot it may be, but well-defined it is not. The objectives of sustainable investing are nebulous. Data is sparse, and what is available is difficult to interpret and frequently not comparable across companies. In the US, the application of fiduciary duty to sustainability is contentious, with the Department of Labor’s position swaying according to the political winds rather than any obvious tie to investor best interests. In most of the rest of the world, the regulatory trend is at least easier to read: there are now more than 500 policy instruments worldwide, almost all of which have come in since the turn of the millennium. Meanwhile, it’s not even clear which corporations are responsible and which are not: a recent study of leading ESG rating providers found an average correlation of just 0.54 between their opinions. 

It is, in short, a mess. A shambles. A goat rodeo.

And that’s exactly why investment firms need to give it serious attention. Any area of investment that’s been grappled to the ground by the quants and the modelers offers at best marginal scope for gain or loss. A goat rodeo means you actually need to think, that you actually face real risk, that you can actually add real value.

When Frank Knight drew his famous distinction between the well-behaved, measurable risk of the roulette table and true uncertainty (where the odds are unknown), he did so in order to make a serious point: that it’s only true uncertainty, not tame well-behaved risk, that is a valid foundation for a theory of profit. 

The messiness of sustainability is exactly why this is where practitioners of real investment should be focused right now. It’s where the action is because of – not despite – the fact that investors are dealing with incomplete data, with unknown and shifting relationships, with changing (and widely varying) client expectations, with difficult-to-interpret science. 

Firms need to decide how to respond. Let’s be honest here: some are going to window-dress. They may well spend real money and hire real people, but it’ll be about adding ESG around the edges and building a nice marketing story. They won’t treat this as a serious investment challenge. 

But there are leaders, too. This topic has made the jump from specialty to mainstream, and the best thinking is now creating a transformation in how sustainability is being approached. What’s possible is changing, expectations are changing, the potential for creating meaningful impact is changing.

Sustainability is a difficult, messy, ill-defined, fast-changing, real-life challenge. And it’s where the real investment process development is happening.