Given the focus on the environment during our recent election, and the ongoing global attention to climate change, I thought this would be a good time to address how the investment community is responding. You may be surprised.
Pension and investment managers have always screened for risks before purchasing any company’s stock or bond issues. These risks were typically financial in nature; like how much debt the company has, where they stack up against their competitors, the quality of the company management, and whether there is future growth for their product or service, and ultimately more profit.
Increasingly we are seeing investors asking harder questions about risk that are non-financial in nature. Does the company have a sound environmental record and/or are they on track to improve their environmental stewardship? Are there companies that are at the forefront of helping climate change with their products? Does the company ensure a safe workplace, including having well functioning anti-harassment protocols? Does the company provide social supports for the countries and communities in which they operate? Does the company adhere to all laws and statutes set out in good governance? Does the company have representation of women in their boardrooms and on their executive? These questions are now part of many mutual fund portfolio and pension manager’s risk assessments and have been named ‘ESG’ – Environmental, Social and Governance screening.
If a company has a poor record in either of the three areas, it could leave the company open to misconduct-driven litigation. This leads to the possibility of public shaming which could severely damage a company’s reputation and consequently their stock price. Since the focus of companies is to make profits for their shareholders, management is increasingly willing to make changes in how they operate to ensure their continued support. Shareholder advocacy is actually changing companies from the inside. There are now some good alternatives for specific ESG investing and we are asking our chosen managers if this is on their radars.
I don’t doubt that the ready availability of information and the current culture of calling out misconduct publicly is playing into this trend, but in my opinion, it is a happy by-product of being an investor in these times. We’d all like to be a contributor for the betterment rather than the detriment of our world home and family.
Thanks for this. As you know, I am a new client but I have been concerned about social and environmental issues for a while. I hoped that in my financial benefits from your research and then in your investment choices that I could also know that these major considerations have been made. I feel more confident about my investments!
We too share your concerns with regards to these issues, Lesley. We will be happy to discuss in further detail with you.