A dear friend and longtime client enjoys educating me on his world view, which varies in many ways from mine. He is clearly an avid reader and forwards material from lots of different publications into my email. His emails provide me some nice mental breaks during my day-to-day work flow.
Walt (I am sure he will not mind seeing his first name in this column) hails from the left side of the political spectrum, and while his philosophy contrasts with my inherent libertarian approach to the world, we accept that he and I both seek a better future and better world for us humans, and with that commonality we are able to maintain an enjoyable continuum of education and debate.
Some time ago Walt began raising my awareness of the concept of sustainable investing. Today, as I follow the Davos investment banking conference in the media, I see this topic has achieved center stage with the planet’s financial elites. With a growing profile in the “collective consciousness,” sustainable investing is surely heading toward the mainstream and so it's good to have a frame of reference.
In an extremely basic form, sustainability will be presented as corporate environmental stewardship, particularly in the context of carbon fuels and emission of CO2, but this simplified perception is much more limited than the full scope of the concept.
At the core, the subject of sustainable corporate behavior, and therefore sustainable investment in corporations, is the concept of business accountability, which has been given the acronym ESG.
The E stands for environmental. Unfortunately, a lot of the bandwidth in the discussion regarding the environment has been focused on carbon emissions, but I would expand this consideration to include general decision-making regarding conservation and environmental stewardship. Let’s face it, some industries simply involve a larger pollution footprint while providing products we as consumers demand, and in some cases, need. Rather than shun higher footprint businesses, my version of ESG would consider how companies in these industries adopt best practices and technology to minimize their impact on the planet.
The S stands for social. An enterprise with a high level of social capital will be focused on equitable treatment of suppliers and customers. In a world of global supply chains and online privacy concerns this area gets a little complicated to surveil. To me as investor, I think intuition goes a long way when evaluating companies for “S.” I like to invest in companies whose products and services I respect and like. Certainly, some companies are better corporate citizens than others, and the S in ESG endeavors to identify which companies are truly a positive influence to society.
The G stand for governance. A well-governed corporation will have an independent Board of Directors and, in my opinion, will split the role of Board chairman and CEO and will treat employees in an equitable manner. One-way governance can be somewhat ascertained by reviewing a company’s annual report. I encourage investors to read the annual shareholder reports and vote their proxies on the stocks they invest in. I know sometimes for small investors this can seem like an insignificant act, but being an investor involves both rights and privileges and proxies represent both. I always focus on the executive compensation packages, and it is often an eye-opening experience.
So, what do I think of ESG? Well, as a libertarian I embrace this idea. The world is not a perfect place, and not all businesses conduct themselves honorably and ethically. ESG promotes collaboration between investors, consumers and activists to influence companies to conduct themselves by a set of best practices when it comes to a perception of the greater good.
Most importantly, however, ESG pursues its goals using market forces and consumer choice, not government coercion and regulation. To me, true sustainability and stewardship can only be achieved when humanity as a whole chooses to make these values a priority. ESG is a positive step in this direction.
Opinions are solely the writer's and are for general information only and are not intended to provide specific advice or recommendations for any individual. Stock investing involves risk, including loss of principal. Marc Ruiz is a wealth advisor and partner with Oak Partners and registered representative of LPL Financial. Contact Marc at marc.ruiz@oakpartners.com. Securities offered through LPL Financial, member FINRA/SIPC.
