The acronym ESG stands for Environmental, Social and Governance and refers to three key non-financial performance indicators used to analyze the sustainability of a company’s business model. Analyzing ESG factors offer investors added insight into the quality of a company’s management, culture, risk profile and other characteristics. Whereas financial analysis helps an investor to determine which companies have successful business strategies in financial terms, ESG analysis helps to identify those companies where their success is more likely to be sustainable in the long-term. By incorporating ESG analysis, we seek to enhance our ability to identify companies that:
- Are more forward-thinking in developing their business strategy.
- Are better at anticipating and mitigating risk.
- Meet positive standards of corporate responsibility.
- Are focused on the long-term
In applying ESG analysis to the security selection process, we examine how a company’s policies and business operations are affecting five major stakeholders’ being Workers, Communities, Customers, Shareholders, and the Environment. Our goal is to identify those companies who have made a commitment to evaluate ESG risk issues and their impact on each of these major stakeholder groups as part of their ongoing strategic decision-making process. To help us identify such companies, we use a variety of resources including JUST Capital, a non-profit organization committed to “Stakeholder” capitalism as well as Bloomberg ESG research. We use this information to screen for companies in all economic sectors that possess positive ESG characteristics. We then apply our traditional financial analysis to these companies to identify those with superior financial strength and substantial competitive advantages. Thus, we can construct portfolios consisting of companies that have superior financial and ESG characteristics.
One of the arguments against ESG investing has been that investors must accept lower investment returns to have a portfolio consisting of companies with good corporate behavior. We would disagree with this argument especially concerning long-term returns. It’s obvious to us that companies that behave properly with respect to environmental, social and governance issues and who seek to benefit all stakeholders, possess more of the characteristics for long term success than those that don’t. We of course recognize that no one, no company, nor ourselves is perfect with respect to these processes or goals. However, as George Will said, “the pursuit of perfection often impedes improvement”, and it’s this improvement in this process that we’ll continue to strive for.