don't you hate it when you're told you can't get what you want but when you listen for it the world gives you this message just about every day when you're told you can't have it both ways you can eat healthy food or fast food not both you can drive a fast and fun car or save money on gas not both somehow when issues are framed this way we're more likely to accept that we can't get what we want tonight I'm going to ask us to stretch ourselves so we can demand both this and that when it comes to our investments now earlier in my investment career I heard more than once Karina you can't get what you want you can either make money on stocks or save the planet not both people been trying it for years and it doesn't work the returns are lousy fast-forward to today my colleague David Powell David Powell and I we manage money for a wide variety of institutions families and endowments by now we've learned enough to know that this idea this notion of a trade-off between planets and profit it's just bad framing it's not about whether we might make less money by considering the environment for me it's not about a trade-off whatsoever it's about how can we make more money by finding situations where companies are being smart about the environment in ways that helps them grow their revenues reduce costs and increase market share in short it's about figuring out how to have it both ways when I was a chemical engineering undergraduate student I spent the summer at a recycled paper mill at this exact industrial site you see here I worked on a water conservation project and involved collecting a lot of paper pulp and slurry samples from these giant pipes and vats and valves and in a somewhat exhausted state from this work I had a bit of a personal epiphany I saw how much water we were saving and with less water inputs we were creating less sludge less waste and the processes that we put in place to conserve water also help to improve product quality so there it was right in front of me a business strategy that was good for the customer good for the environment good for the bottom line and good for shareholders cool I wanted to sort of jump on the bandwagon and help a lot of companies become cleaner and greener too so for my first job out of college I worked as an environmental engineer helping companies large industrials like this one comply with air emission regulations so that's not a terrible idea right I mean it's better to comply than to not comply and pull weak too much right well it was an eye-opening experience for me I was the last person any shift manager or business leader wanted to see or spend time with as nothing but it costs ink they just wanted me to measure their emissions rubber-stamp compliance rate and regulations and get the heck out that was my introduction to the conventional wisdom that business strategies are disconnected from environmental factors and yet the environment affects companies in so many different ways there's pollution and health effects reputational damage changing consumer preferences you know a lot of these issues weren't on the radar screen for many companies just ten years ago think about for example the organic food industry that used to be niche but now it's really mainstream or think about vehicle fuel economy as a key driver for engine design and customer choice because you wouldn't want a car company to lie to you about your car's fuel economy right right so you care about these issues environmental factors are fundamentally changing the game for business some companies will adapt and succeed and others will fail if you're an investor you should be thinking hard about who those winners and losers will be the best companies they're not just going to survive in this rapidly changing environment but they'll find ways to thrive they'll figure out what's going on with water scarcity climate change and they'll pivot their strategies accordingly well before it's too late and the fine ways to reduce their costs and risk on one hand and smart ways to invest in the corollary opportunities to innovate and grow on the other now earlier I had talked about this bad framing of profits versus the planet because of this false assumption investors have been conditioned for years to turn away from critical environmental factors so conditioned that thanks to good work done by others in the investment community the US Department of Labor decided to issue a clarification statement to pension funds around the country because many of them thought they were prohibited by law from considering the environment and sustainability in their investments they thought it was illegal to do so these very factors that so many of you as counterproductive to making money are driving real business results today I speak from experience it's at this intersection of performance strong business performance and sustainability where we find some of the most compelling long-term investment opportunities so let's take a look at that intersection for the sake of discussion tonight we're going to use this very simple chart with business on one axis and the environment on the other when it comes to assessing business fundamentals there's a lot that goes into figuring what makes for a great company within a good to great industry things like management track record of success returns on capital the competitive dynamics there's a whole host of qualitative and quantitative information that goes into that analysis on the environmental axis the relevant research is what are the environmental strategies that make these great fundamentally strong companies even better and that's what we call environmental business advantages or e ba and when we find great companies with identifiable EDA we know we have a good candidate for long term investment especially because the rest of the market isn't paying as much attention to these drivers of competitive advantage as we are let me give you an example Cummins and Navistar they compete in a heavy-duty truck engine market now Navistar took a contrarian view when faced with new pollution regulations that really required brand-new emission control technologies they bet that their old engine platform was somehow going to meet these new air emission regulations and they were wrong they were really wrong 2010 rolls around and they begin to get fined for every engine that they were selling that was non-compliant too polluted and it gets worse by 2012 they had to abandon their entire engine platform the company as a whole becomes unprofitable and has been ever since and for their own trucks that Navistar manufactures they had to begin buying engines from Cummins their competitor now Cummins on the other hand with a technological leader they invested early since the early 2000s in R&D and pollution control technologies to create a clear path to make engines that were cost-effective and that exceeded these new requirements because of their technological lead the stricter the regulation the better it is for comments this environmental business advantage has helped come and trounce the competition on a global basis they have two to four times the market share of their closest competitor let me give you another example Yum Brands they may need no introduction they own KFC Taco Bell Pizza Hut and their entire reputation was hit hard in 2012 when a third-party agency disclosed that they had detected 18 different antibiotics and chemicals many of which had been banned in China that were used to fatten up their chickens quickly and then in 2014 their stock price took another hit when an investigative reporter in China disclosed that one of their major meat suppliers had been falsifying expiration dates now young competes in a fast food but slow growing industry competition is intense margins are generally thin they Duke it out for market share food quality is a critical factor for success in such a competitive environment how are you going to gain an edge you can gain an edge because of the environment and you can use middle B now middle me may be a company you've never heard of but they are definitely a part of your diet if you've ever had a toasty sandwich at Subway enjoyed a warm pastry at Starbucks or ever ordered a pizza that came out of a conveyor oven middle B is a global leader in energy efficient cooking equipment many other ovens operate at less than half the energy use of competing models and their view on sustainability goes well beyond energy efficiency for example they've innovated a new waterless food steaming technology it's actually pretty important for some restaurants around the world where water scarcity is acute so middle B is about saving energy saving water it's also about food quality because of the controls they can put in place in kitchens for customers this isn't just about sustainability it's about growing your top-line and cutting costs to compelling customer value propositions that never go out of style because of this environmental business advantage middle B has been able to far outgrow the pace of the broad fast-food industry and they're growing at twice the rate of any competitor so if you come at this with strategies that assume a trade off quality food versus fast food you're going to assume away the very possibility of having it both ways some of the best innovations blow past these false dichotomies you don't need to ask do you want a small computer or do you want a really useful computer you can have a smart phone and you can participate in that success through ARM Holdings now in this audience there are hundreds probably over a thousand arm designed chips in your purses and your pockets right now and that's because about 30 years ago the company that became arm made a decision that some thought was foolish to design their micro processors around whoa power and energy efficiency while Intel and the rest of the industry was designing around computational power and speed because chip functionality has increased dramatically you're pretty happy with the features of your smartphones in general and it's in part because they're energy efficient we can deal with those small batteries an arm has essentially enabled your mobile lifestyle by now arm has 100% market share in smartphones and they're going after Intel's bread and butter in the larger form factors of computer servers - now let me give you some common sense context as to why companies land on this chart the way they do Intel is actually in this quadrant with a wonderful representation along environmental strategies they're really good at managing their operations squeezing out efficiencies and reducing waste they have a true commitment to sustainability they've won awards for this it's just not environmental business advantage in this case it hasn't created competitive advantage to the extent that arm has been able to build and to have persist for decades now the star is in this lower left quadrant because they ignored much less manage their environmental risks and opportunities and they're still paying the price with lack of profitability and yum is down there too for lack of food quality and unsustainable practices that frankly could harm human health as well as animal welfare now this is a curious Bunch and I'm sure you're wondering if there's any companies up there in the blank upper left quadrant and there are and I'm just going to say something quickly about those companies even if a company is making out size profits today if a company is not managing their environmental risks and opportunities well I believe they are in danger of falling into that very very risky quadrant in the lower-left because environmental factors are not disconnected from company fundamentals from the business meanwhile in the environmental business advantage quadrant we have Cummins profitable with leading global market share we'll be growing fast and taking share arm 100% market share these are great business strategies in enormous markets these are great environmental strategies it's having it both ways now if building environmental business advantages were easy everybody would be doing it and you would have heard of EBA before tonight right well a common thread and the examples I just mentioned is that it takes years of investment and strategic intent to build EBA to build competitive advantage and that's never easy but some of the smartest companies the best investments are committed to building EBA they may not call it that yet but they're doing it not just because customers are demanding good corporate citizens or just because of regulation or because Greenpeace or other organizations are demanding greater action for the greater good it's actually about greater greed which gives us an opportunity as investors to think about where companies greater greed intersects with our greater good now notice I'm not talking about solar wind compostable toilets or growing honey combs in every backyard individual actions are essential yes but there are trillions of dollars available today many of these dollars are yours and this enormous amount of capital may be stuck with a mentality that sustainability is an obstacle to making money but let me ask you to imagine if you will a realistic more sustainable future it's not utopia I'm not asking you to imagine yourself growing all of your own food or dismantling and recycling your car you may want to do that and that's fine but whether you care about sustainability or not you're likely to want in this future you envision rising standards of living for yourself for our kids and for their grandkids and so will the billions of people around the world expected to enter the middle class over the next decade who will demand creature comforts like the goals fast food and smartphones this future does not have to pit profits vs. the planet it's not a dichotomy because there are companies who are building this world today if you envision vehicles in this future of yours there are companies who will meet your demand with cars that are fast and fun to drive and less polluting and more fuel-efficient than they are today and if you prefer to share rather than own your car companies will help you do that too so as we speak some of the smartest companies are making investments today for their own long-term sustainability in their own economic self-interest so they can compete for your loyalty and your dollars tomorrow so hopefully I've convinced you to believe in the and not the or and if you want to have it both ways let's move this forward talk to your employers and your employees encourage them to be thoughtful about the future rattle the cage in your industry and come up with smart money-making environmental strategies go build the companies I want to invest in 10 years from now I promise you if your company doesn't innovate your competitors will talk to the schools and the nonprofits you support urge them to raise the bar on what we can expect from those endowments tell your neighbors to as you swap investment stories tell them they don't need to settle it's time we eradicate this notion of a trade-off there is no trade-off you can have it both ways thank you you