Thousands of starfish washed ashore. A little girl began throwing them back in the water. A friend said, ‘Don’t bother, it won’t make a difference.’ The girl stopped for a moment and looked at the starfish in her hand. ‘It will for this one.’
Question: With increased attention on corporate misdeeds, what are your thoughts on companies focus on profitability, sustainability as well as accountability?
Answer: As the focus on technology intensifies, a quick glance at any newsfeed or social media app offers plenty of coverage on corporate behavior. It’s logical that companies with responsive policies, strong-balance sheets, integrity, and proper planning should be better candidates to solidly emerge on the other side of the current crisis. The trend is for citizens and investors to focus on proper behavior as well as profitability.
Metrics are designed to help evaluate corporate behavior as well as investment potential when making investment decisions. It’s becoming more likely that long-term performance will be influenced by companies’ attention—or lack thereof—to possible regulatory and reputational risk as the influence of technology increases. State Street Global Advisors found that 35% of pension fund investors reference this as the top reason to incorporate environmental, social, and governance (ESG) factors into their process.
ESG is driven by emotion and results. Transparency allows shareholders to make informed decisions based on precise financials and alignment of beliefs. The shift takes place by moving beyond purely exclusionary factors and avoidance of particular companies to a deeper analysis for inclusion of Sustainability Accounting Standards. These Principles for Responsible Investment and Sustainable Investment Goals in collaboration with global corporations provide a blueprint for transparent and sustainable ESG data. Institutional and individual investors are interested in aligning portfolios with not just financial goals, but their values.
In theory, this may sound wonderful, and perhaps a bit too touchy-feely for some; so let’s discuss results. According to Morningstar, total assets in U.S. sustainable investments grew 14.3% to $119.3 billion and jumped to $683.9 bill, up 81.7% in Europe during the first quarter of 2020. Companies that operate with a sustainability focus bring a new element of risk management to the party. Morningstar also notes that ESG focused companies outperformed during the downturn in the fourth quarter of 2018.
Sustainability isn’t just about the environment, it includes aspects of employee engagement, payment, development, diversity, inclusion, data protection, privacy, and community relations. On the governance front, principles and benchmarks include transparency and examination of executive and board compensation; and whistleblower treatment. The ultimate intention is for the proper fulfillment of duties to improve financial performance over time.
According to Federated-Hermes, Inc. proprietary ESG data integration, year-to-year data shows that companies in the top-quarter of social sustainability, which includes a high concentration of technology companies, have outperformed “social laggards.” The statement doing good and doing well is not mutually exclusive. A study published by the Journal of Applied Corporate Finance states that companies with high ESG ratings tend to have lower costs of capital, higher profitability and strong performance. The CFA Institute also found that adherence to ESG metrics may reduce volatility and exposure to future risks. Of course, there is still the need for proper due diligence as with any investment decision making process.
Early on, institutions drove the growth in the ESG space, followed by women and millennials. Men, foundations and endowments and HENRY’s (high earners, not rich yet), are increasingly looking at these investments further hiking demand. The case can also be made that a strong desire for a clearer understanding of supply-chain management as we emerge from the current COVID-19 crisis will influence corporate governance and social policies as well as the investment decision–making process. Interaction between the public and private sectors are changing, and that could be a good thing. Stay focused and invest accordingly.
Past performance may not be indicative of future results. There is no assurance these trends will continue. The market value of securities fluctuates, and you may incur a profit or a loss. Investing involves risk including the possible loss of capital. All investments are subject to risk. The opinions expressed are those of the writer as of June 7, 2020, but not necessarily those of Raymond James and Associates, and subject to change at any time. There is no assurance that any investment strategy will be successful. Asset allocation does not guarantee a profit nor protect against loss. Information obtained from outside sources is believed to be reliable but cannot be guaranteed as such. Investing in accordance with ESG principles may result in investment returns that may be lower or higher than if decisions were based solely on investment considerations.
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