Having a Positive Impact Through Public Equities

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Clients value knowing that their investments are making a difference. And they value the advisor that has gone the extra mile to choose managers who have an impact.

However, just screening out “bad” companies isn’t enough anymore. Clients want a healthy investment return, and they want that while investing in strategies that help address critical environmental, social, and governance issues.

Integrating environmental, social, and governance (ESG) factors can make investors better at what they do. For example, we consider ESG factors as a core part of investment analysis because we think they give us extra insight into a company’s success over the long term. This can come from superior innovation, enhanced productivity throughout the value chain, and better governance leading to lower risk. Study after study has shown that the stocks of companies with the strongest records on employee relations and environmental responsibility performed better than those with the weakest records by a significant margin – they are less risky. For example, a company that subverts the law or widely adopted international standards with staff or contractors is exposed to legal, regulatory, and reputational risks that may create roadblocks for both its existing operations and any efforts by the company to expand to other markets. Conversely, companies that effectively manage these resources well may be at an advantage in attracting and retaining highly talented individuals, which leads to increased revenues and reduced costs.

We prefer to own companies that grow by reinvesting earnings into their business and have highly motivated and innovative employees. Taking ESG factors into account in our investment analysis also lets us identify potential areas of concern before they become a material issue for the company.

However while it’s a start, integrating ESG considerations is not enough to consider a public equity portfolio an “impact investment.” Shareholder advocacy needs to be an integral part of the strategy as it has the power to create change at the corporate level. Given the large social and environmental footprints of publicly traded corporations and their high allocation in most investor portfolios, public equities present a major opportunity for impact.

Our firm uses constructive dialogue and shareholder proposals to push companies to show respect to people and planet. This comes out of a belief that, by addressing climate risks and listening to local communities, companies can possibly avoid big losses. In terms of engagement, we concentrate on issues that have been highlighted in our ESG research process as areas in which a company could improve. If these sorts of dialogues fail to make progress, we can file shareholder resolutions to bring the issues to a vote among the company’s shareholders. This often focuses the minds of management pretty quickly. Some of them have been successful and are acted upon by management while other proposals are more combative in nature. Some don’t receive high votes from other shareholders but all resolutions have the effect of drawing attention to the issue within the company, with other shareholders, and potentially among the public. These active ownership strategies can also create a halo effect: investors urge a few companies to take action on an issue, and other companies take note and choose to adopt a more sustainable policy in order to avoid being the target of similar shareholder action.

Many clients feel that aligning their values with their investments is the moral imperative of our time and their responsibility toward future generations. We all want to maximize portfolio returns. But when those portfolios are invested in a socially responsible manner, we can truly maximize our impact with the potential for both higher financial returns and greater social returns. 

The information, analysis, and opinions expressed herein are for general and educational purposes only. Nothing contained in this piece is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice. Investments in securities are not insured, protected or guaranteed and may result in loss of income and/or principal.