I’m a big fan of the movie “Sully”. Since I live and work near NYC, I’m often reminded of the “Miracle on the Hudson” whenever I’m near the river. My most memorable scene from the movie is when Sully and his co-pilot are facing a disciplinary panel from the NTSB. The panel challenged Sully on why he ditched the plane in the river when he could have landed safely at either LaGuardia or Teterboro airports (based on what turned out to be flawed flight simulations). Sully responded to the charges with some reality-check-insight: “…you have not taken into account the human factor. You’ve allowed no time for analysis or decision-making. In these simulations you have taken all the humanity out of the cockpit.”
It turns out that when the NTSB re-ran the simulation with a 35 second delay for the “human factor” (a chance to react to the emergency and come up with a plan to keep 155 people alive), the simulators showed the plane crashing into densely populated urban areas near LaGuardia and Teterboro. The only viable options turned out to be the Hudson River or the NJ Turnpike. Trust me, they were safer on the river.
We must be careful not to take the “human factor” out of our investing decisions; we can’t take “humanity out of the cockpit”. As mentioned in a previous blog (1), there are three main categories analysts use to gauge the strengths and weaknesses of a firm’s sustainable practices, labeled “ESG” (environmental, social and governance factors). We briefly touched on governance in the prior blog; today we’ll touch on the “social” factor, which includes labor relations, working conditions, non-discrimination policies and abstract concepts like “corporate culture”. All else being equal, we’d prefer to invest in companies that value and commit to investing in human capital.
When it comes to the human factor in measuring how attractive a company might be as an investment, we look at both the hard facts and soft facts as they relate to management and employees. The hard facts could be how many accidents employees are involved in at an oil drilling company each year. If the number is high compared to industry peers, it could reflect a lack of safety training and aggressive risk-taking by the firm. That could be a red flag for investing in that firm.
The soft facts relate to things like the “corporate culture.” Does the firm cultivate an atmosphere of respect in employee relationships? Does the firm practice a policy of promotion from within and provide merit-based training and compensation? Do people feel tolerated or celebrated? This information was not made available in the past, but corporate transparency has risen in recent years as public companies pro-actively engage with ESG research firms to promote their commitment to a building healthier corporate cultures.
The U.S. labor economy has shifted dramatically over the last several decades from manufacturing to the service sector (2) and now the tech-driven “information economy” (3). This transition has placed a premium on the use of computers which translates into the need for additional education. I interact often with recent college graduates in the Millennial generation about Sustainable Investing. They’ve had computers since pre-school, so they are well-positioned to thrive in the information economy. They are tech-savvy and well-informed; they use Google to “trust but verify” pretty much any topic in any conversation.
The best firms understand that Human Capital is their most valuable asset. When Millennials interview for jobs, they ask as many questions about the firm as they answer about their resumes. The firms that cannot articulate a compelling vision, but mumble back vague answers about what they stand for, may be crossed off the list.
The best talent is attracted to leaders with vision. Those are the firms we want to own. This generation wants to make a good living, but they also want to feel like their career efforts are contributing to making the world a better place. I say, “Amen, good for them.” It’s why “Purpose Driven Life” has sold over 30 million copies.
At Archetype Wealth Partners, our ESG portfolio is constructed using our “three dials” approach, with the additional overlay of seeking strong environmental, social and governance factors.
If you would like to learn more about our approach, please contact me.
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