When I started off in this industry back in the early 1990’s there was a push towards socially responsible investing. This typically revolved around avoiding companies complicit with social topics like human rights abuses and unfair labor, or companies in the “sinful” industries like guns and tobacco. Investors wanted to focus on Green Investing or Impact investing that helped the environment or aided in poverty. Investment houses tried developing mutual funds and other investment vehicles with this focus, but they never really lasted. Why? Mostly because as investments they were never strong performers and did not attract enough investors to keep them going. Also, they never really did anything to help solve the underlying issues. Rick Bloom, when asked about it during his radio show, would advise people that instead of losing money in these investments, they should invest properly then donate a portion of their gains to causes that help provide solutions.
While we have not heard much about this style of investing over the years, it has not gone away. These principals have evolved into an investing approach that is growing in popularity, called ESG (Environmental, Social, and Governance) or Sustainable Investing. Here are some of the ways that ESG breaks down:
- Environmental – Clean technology, focus on waste & pollution, climate change and use of natural resources.
- Social – Concern for product liability, data privacy, treatment of employees and other human capital and general health and safety.
- Governance – Transparency of accounting practices, board actions and general ethics.
Evidence has shown that screening for these ESG criteria has measurable influence in an investment portfolio’s outcome. This has touched off a shift in investor thinking and displaced the conventional notions of socially responsible investing.
So, how is this translating into your investments? Your goal is to invest in assets that will provide long-term, sustainable results. Investment companies are adopting this belief that companies that disregard the environmental and societal consequences of their operations, or operate with weak corporate oversight, put their long-term financial results at risk.
The negative environmental and social impact of oil spills, mining explosions and unsafe products can be fatal, and the cost to shareholders can be severe. Over the years we have seen these highly publicized events create shareholder losses ranging from 30% to almost 100%. Poor accounting controls or governance can undermine the success of a great business that was previously characterized with strong long-term prospects.
Many investment companies have added a layer of ESG analysis to evaluate the risks and opportunities beyond the scope of traditional risk analysis. Some even have analysts dedicated to monitoring ESG criteria for all their current and potential holdings. The results of this screening are measurable. Companies that score higher on ESG screens tend to have higher profitability and lower levels of leverage. So, during times of market downturns, these companies tend to be more stable. Since these companies have more solid balance sheets, they tend to be better positioned to focus on mitigating ethical issues and introducing sustainable practices.
Corporations are also recognizing this impact and responding. As they see increased questioning about how sustainability impacts their business, many corporations have implemented sustainability and corporate social responsibility programs, participate in voluntary initiatives, and openly report their ESG standards.
Now, is this here to stay, or just a fad? Consumer preferences are changing globally and there has been a swell of demand for sustainability from the companies we do business with. Consumers are even willing to pay a little extra to support companies that support shared causes.
Now add to that this evolution we are seeing with this Millennial Generation. The Millennial generation has always had this tag of being more about the experience, technologically savvy, and socially conscious. This generation has also become financially savvy even though they tend to earn less than their parents’ generation. Millennials are getting older, building their families, and acquiring wealth through various means. They are savers and investors, and their principals are influencing how they invest their money, and it is not always in the traditional ways. Looking ahead, many of these principals are also seen in the Gen Z generation, but even more amplified.
At Bloom Advisors, the majority of our funds have adopted ESG standards, some have even become leaders on the forefront of this movement. Our team continues to regularly evaluate funds based on traditional analytics as well as company ESG practices.