ESG and Sustainable Investing: Pay it Forward
Peter Roselle | August 17 2018
Back in 1916 the author Lily Hardy wrote, “You don’t pay love back, you pay it forward.”
It’s a great principle that plays out in many ways in our lives. Think of parenting. There seems to be a universal law that parents in every generation, in every culture, want to provide a “better life” for their children than what they experienced.
By that definition, paying love forward for the next generation would include careful stewardship of the family’s resources in order to leave an inheritance – not just money, but a better way of life. You can take your pick on what a “better way of life” might mean… more education, owning a home, helping with the grandchildren… the specifics will vary but the desire to provide an upgrade appears to be hard-wired into our DNA.
Parents aren’t the only ones that want this, leaders in all walks of life desire to leave legacies. The leaders of New York City decided to “pay it forward” in 1856 when they paid $5 million for 840 acres in midtown, preserving the land we now call “Central Park.” Nice inheritance.
Leaders of public companies are also picking up on this stewardship concept under a broad heading called “Sustainability”, or Environmental, Social, and Governance (ESG). They are voluntarily creating new sustainability departments to document their policies and issue lengthy annual sustainability reports, covering a wide range of subjects from workforce diversity to resource and energy management. In fact, 85% of S&P 500-member companies published these reports in 2017, marking a dramatic increase from 2011 when less than 20% did so .
Given the fact that public companies are subject to intense scrutiny about how they spend their money, you might wonder why they are adding personnel in new divisions and issuing reports that aren’t even required by law. Are they squandering their stakeholder’s money? There can only be one answer: They’ve concluded that choosing not to issue the reports would be even more costly to the business in the long-run… so they are paying it forward.
As a portfolio manager I’m delighted to observe this trend. As you may know, economics was long-ago labeled “the dismal science” (1849, by Thomas Carlyle). This is partly because using the word “science” implies a high level of predictability. In a true science, like chemistry, every time we add 2 hydrogens + 1 oxygen we get water – there is zero uncertainty. But in the dismal science of economics we’re forced to deal with unpredictable human beings, which always brings some level of uncertainty and risk.
Since markets hate uncertainty, we should all be thrilled to see an emerging discipline like Sustainable Investing that is helping drive a trend of increased transparency into the operations of publicly-traded companies. With every passing day it gets harder for companies to hide bad behavior and easier for investors to hold them accountable for their actions (or inaction). As this data has proliferated, portfolio managers have been able to make better decisions about which companies to own or avoid based on the greater pool of available research.
What is "Greenwashing"?
One final warning if you are trying to do this on your own: beware of a sketchy trend called “greenwashing”, a younger cousin of “whitewashing” (it’s not in the dictionary yet). Whitewashing implies pouring bleach over something to “gloss over faults, errors, wrongdoings, or absolve a wrongdoer of shame” . Greenwashing is a similar concept – companies embellishing the facts about their environmental policies. This could cover a range of issues like how they handle dumping industrial waste down to smaller-scale goals like switching to LED lightbulbs to save electricity. Your risk is that you could make an investment in a fund full of green-washers – they’re talking the talk, but not walking the walk.
The quantity and quality of this data keeps improving. As an investor you won’t have the time or expertise to do the fact-checking on your own, but be encouraged that we work with research companies that are compiling the data, scouring the web and verifying the facts.
If you would like to learn more about our Sustainable Investing approach, please contact me at Peter.Roselle@ArchetypeWealth.com.
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