Sustainable Investing is Tried and True
What are your core values? Many of us might cite responsibility, honesty, and fairness, among others.
For those of us who want to align our investments with such values, there is a solution: sustainable investing, sometimes described as ESG.
“ESG” stands for the environmental, social, and governance criteria that sustainable investors use to assess companies. These lenses are employed in addition to traditional financial analysis of profitability, credit worthiness, and the growth potential of a company.
Sustainable investors want to change the world for the better. This is reflected in the companies and funds they choose to invest in or avoid. It can also be expressed in how they vote at annual shareholder meetings, and the ways they engage with management to improve companies’ business standards.
Importantly, sustainable investing is also about avoiding risks associated with climate change (e.g. rising sea levels), as well as mismanagement, corruption, environmental disasters, and labor unrest. Think BP’s Deepwater Horizon oil spill in 2010, or the collapse of Enron due to accounting fraud in 2001, or Boeing’s 737 Max crashes in the early 2020’s, and the ensuing coverups, investigations and lawsuits.
Finally, sustainable investing is about seeking superior investment returns. Better managed companies make better investments. The numbers provide ample evidence of this. Sustainable (or ESG) versions of leading indices like the S&P 5001 or MSCI All Country World Index2, have outperformed their conventional counterparts over a range of time periods.3 In other words, investors can align their investments with their values without sacrificing performance.
For stock pickers, rating agencies like Standard & Poor's offer ESG rankings for most publicly traded companies. Easier still, investors can choose to invest in the wide assortment of mutual and exchange traded funds that follow sustainable guidelines.
At a time when our planet is under increasing threat, and when climate related risks to business are multiplying, sustainable investing offers a way to address these issues. ESG looks at the impact of a corporation’s business activities on the environment (the “E”). Is the company working to reduce carbon emissions and managing the risks of industrial accidents? What is its effect on biodiversity? Is it taking responsibility for mitigating its impact?
ESG funds tend to avoid investing in fossil fuels, considered by most scientists to be the main culprit in the rise of global temperatures and increasing frequency of lethal floods, fires, and hurricanes. ESG investors may also choose to invest in companies that offer solutions to the environmental crisis through renewable energy, water treatment, and pollution remediation.
Social criteria (the “S”) assess company relationships with their employees, customers, and community. Do they treat their workers fairly? Do they offer adequate employee benefits and workplace safety? Are women paid equally to men and given the same career opportunities? Are people of color and other minorities protected from discrimination?
Sustainable investors consider whether a company’s product, either by intention or through ordinary use, hurts people. Private prisons, tobacco, civilian handguns, chemical weapons, landmines, and cluster munitions, fall into this category. Furthermore, are products safe, of good quality, and ethically marketed? Are customers treated fairly, and their personal data protected? And does a company give back to its community?
Governance (the “G”) is the third ESG lens. Sustainable investors look for companies that are well managed and conscientious in their business practices.
Is a company’s board of directors independent and capable of overseeing the business? Does it include women? Does the compensation of top executives reflect their job performance? Are the concerns of shareholders considered by management? And is the company transparent about its environmental and social impacts?
Sustainable investing is about values most people consider self-evident: taking responsibility for our actions, speaking the truth, treating people with respect, and protecting our earth and the creatures we share it with. These values are tried and true, and we have never needed them more than now.
This material is intended for education purposes only. LongView Asset Management, LLC (referred to as "LongView") does not warrant that the provided information will be free from error. None of the information provided is intended as investment, tax, accounting or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement of any company, security, fund, or other securities or non-securities offering. This information should not be relied upon for transacting securities or other investments. Under no circumstances shall LongView be liable for any direct, indirect, special or consequential damages that result from the use of, or the inability to use, the materials provided. In no event shall LongView Asset Management, LLC have any liability to you for damages, losses, and causes of action for accessing this commentary. Past performance is not indicative of future results. This content not reviewed by FINRA. Photo by Claudio Testa on Unsplash.
1. https://www.institutionalinvestor.com/article/2df3fu4tldqw32jc0j4zk/innovation/why-the-s-p-500-esg-index-continues-to-outperform-the-s-p-500
2. https://www.msci-institute.com/charts/cumulative-performance-of-highest-vs-lowest-rated-esg-quintiles-in-the-msci-acwi-index/
3. https://www.msci-institute.com/type/article/to-understand-sustainability-and-performance-tape-this-table-to-your-wall/