Sustainable Investing

 

Introduction

Over the past several decades, Wall Street traders have trended towards making money from short term strategies and instruments such as futures, options, arbitrage trading, and various other forms of derivatives. Conversely, our clients typically make money from dividend yields and long-term earnings growth. Because of Wall Street’s influence, the most commonly available and used financial metrics reported by publicly traded companies are geared towards Wall Street’s shorter-term trading strategies.

Over the same historical period, pensions have largely been replaced by IRAs and 401(k) plans, forcing most Americans to become personally invested in the stock market. They are now responsible for their own long-term performance, but with very little investment expertise. The rise of mutual funds & exchange-traded funds (ETFs) helped fill that void by providing diversification and professional management for retail clients. However, this trend also made investments abstract, disconnecting people from understanding the companies they own and where their profits come from. As a result, people naturally do not feel an ethical responsibility for the actions of public companies, despite being significant owners/shareholders of these companies.

The response to both trends – focusing on longer-term financial metrics of companies and reconnecting to our ethical obligations as responsible shareholders – is what we call sustainable investing.


Sustainable Investing

At its core, Sustainable Investing is an investment discipline that incorporates Environmental, Social, and Corporate Governance (ESG) criteria which aims to strengthen long-term returns while simultaneously creating positive social impact.

We strongly believe, and the data increasingly supports, that sustainability and performance do not have an inverse relationship, and that ESG investing does not mean sacrificing long-term returns. On the contrary, ESG investing means incorporating long-term data points and risk factors that have not historically been priced into popular short-term valuation metrics. As such, we believe that incorporating ESG is a smart long-term investment and risk management strategy regardless of ethics or social impact.

That said, we also believe the potential impact that sustainable investing can have on our society and the planet is enormous. As most of the world has now embraced some version of a capitalist system, any changes in the way that capital is deployed can have monumental impact worldwide. We can affect change through our investments by:

  • Encouraging independent reporting of companies’ ESG scores; this helps companies identify low-cost or no-cost areas to:
    • improve their environmental footprint
    • encourage workplace diversity and empowerment
    • identify structural or operational risks
  • Engaging directly with companies to address specific practices and/or opportunities
  • Funding infrastructure projects with a positive social or environmental impact
  • Financing industries and innovations with positive long-term environmental impact
  • Tying ESG to the cost of capital to incentivize improved ESG practices

Conclusion

Sustainable investing is a rare example of being able to have your cake and eat it too. Most people understand that a company’s environmental footprint today is connected to regulatory and/or lawsuit risk down the road. Most people agree that compensation programs that provide bonuses for short-term performance end up incentivizing risky behavior. However, neither of these are likely to impact a company’s next quarterly dividend, and are therefore largely ignored. Sustainable investing means taking a longer-term view of a company by incorporating these types of ESG factors as fundamental criteria when determining a company’s valuation; it means working with and encouraging companies we own to operate in a sustainable manner over the long term.