Environmental, Social and Governance is the all-inclusive term, and evolution of what has been previously called “Eco or Green investing”, Socially Responsible Investing (SRI), or Sustainable Investing.
It is a form of impact investing and serves as an additional screen, or lens, that is applied when selecting the underlying companies in a portfolio or fund. Traditional analysis would scour the financials, product lineup, supply chain management, revenue projections, worker productivity, etc. These were the fundamental metrics that were studied in the academic world and by financial analysts. However, what wasn’t taught in business schools, yet directly affects shareholder risk, was the impact each company faces when failing to address the risks associated with environmental and social issues.
Investing with an Impact
Factors that relate to a companies interaction with the environment (greenhouse gas emissions, CO2 mitigation, carbon offsets)
Factors that relate to a companies practices that have a social impact
(human rights, fair labor laws/initiatives, fair trade, gender and race diversity and equality)
Factors that relate to how a company is governed (political funding, lobbying, fair governance, shareholder rights and transparency on all issues)
ESG Evaluation Factors
Environmental damages (and possibly massive lawsuits)
Health issues that could arise from the harmful toxins and chemicals emitted or found in their products
Carbon emissions that would add millions of tons of CO2 into the atmosphere
Social injustice (real estate depreciation, smog, land damaging effluent and runoff, micro polymers released (asthma), carcinogenic toxins) to neighboring communities
Wage disparity issues to women and minorities
Executive compensation and equity distribution
Lack of diversity in leadership and management roles
Employee exploitation and discrimination
Ineffective board which provided minimal oversight and involvement
Lack of financial transparency leading to tax fraud and accounting scandals
Poor employee relations and benefits leading to high turnover and higher acquisition expenses
Failure to provide workplace safety and adequate training
Personal injury to end users or even second-hand users
How does your portfolio stack up?
There are dozens of other metrics to measure a company’s viability and long term prospects. ESG analysis scrutinizes these issues to quantify both a company’s financial fiscal health and long term sustainability as a good corporate citizen.
Overall, this process provides a reduction in risk, a better understanding of the core mission, and a more thorough understanding of each company’s commitment to do their part to restore the health of our planet…and intrinsically the health of the comprehensive portfolio.
Many large institutions, pension funds, foundations, charitable organizations and even corporations are creating minimum standards to construct their portfolios, their business models and supply chain to ensure they only invest in, or partner with, companies that are committed to a world in which future generations can thrive.
Syntropy utilizes investments that consider all of these additional factors much as other large, forward thinking institutions do. We feel that it is an inherent part of our fiduciary duty to evaluate all risks and opportunities to build the best portfolio for our clients’ long-term success.
“There are risks and costs to a program of action, but they are far less than the long-range risks and costs of comfortable inaction”
John F. Kennedy