Baby, if I could change the world
By: Kevin Entwistle
Tags: Wealth Management, Impact Investing, Sustainable Investing, Finance, Esg

Written by: Kevin Entwistle

Topic: Sustainable Investing

If you know anything about world renowned musician, Eric Clapton, you might know that he was inducted into the rock and roll hall of fame (not once, but 3 times). You might even know that he played alongside many of the Beatles, as well as Steve Winwood (stars attract stars after all). There are some however, that do not know Eric (nicknamed “Slowhand”) is actually an active Philanthropist when it comes to causes such as addiction, poverty, human rights, disaster relief, economic support, and the environment. While his song, Change the World, was written about the devastating loss of his son, the idea of changing the world is a concept we can all relate to.

It has been said, “We make a living by what we get — but we make a life by what we give”. In a related way, our perception of well- being is no longer based on getting rich, but rather, enriching the communities we live in.

Through an investing lense, this idea of giving back to society does NOT mean we must sacrifice our return (or profit) for a socially desirable outcome (like a smaller carbon footprint or cleaner drinking water), as the two are NOT mutually exclusive. In fact, return AND a positive impact on society are both possible at the same time, and often can be a result of the other.

Specifically as it relates to my below discussion on Sustainable Investing (SI), what I mean to say is this: It is no longer acceptable to invest in companies that are out of touch with society’s values or unaware of the outcomes of their decisions.

Because in that case, you will not realize a profit, nor a positive social impact. With that said, let’s be clear on the process of realizing both a positive return and a positive impact. The concept behind SI, or what marketing guru’s have coined, “doing well by doing good”, is this: Identify companies with strong ESG profiles (I will explain this next) that may be better positioned for future challenges, and experience fewer instances of corruption. How can we identify strong ESG profiles? Let’s examine what goes into the process of researching and rating environmental, social and governance-related business practices of global companies.

Companies make decisions everyday —

i.e) Who to employ (are they inclusive of gender, race, sexuality)

i.e) Where to build their product (are their supply chains morally and economically effective)

i.e) How to balance conflicts of interest (does the board consider shareholders, stockholders and other key players equally and is the CEO’s compensation package tied to the proper incentives)

i.e) Or even the quality of their product (does the company use local inputs or discourage excessive short- term “fad” purchases by their customers).

In a way, much of this data is non-financial (like carbon divestment or employee turnover) and while there are many data providers and “raters” bringing sometimes non-apples-to-apples comparisons, it is ultimately left to “investor sentiment” (or our overall belief) whether the reported number is taken at face value or is adjusted to the perceived value. How do we arrive at the final value we place on a company and its initiatives?

The process is as follows: 1. Determine industry materiality factors (what ESG factors matter most to this industry) 2. Determine industry materiality weights (to what extent are these factors relevant to this industry) 3. Rate company across materiality metrics (how is the company doing in mitigating these factor risks or capitalizing on opportunities) 4. Adjust scores relative to industry peers (how does this company score relative to industry peers) 5. Calculate overall portfolio score (how does the entire portfolio score considering scores and security allocation).

Throughout this process, we can select or decide not to select companies based off of two ideas — exclusion or integration.

Exclusion mitigates risk from your investment portfolio by leaving out sin companies producing socially unaccepted products, like Tobacco or Firearms. On the other hand, Integration diversifies risk by pro-actively selecting companies re-thinking the outcomes of their decisions and incorporating environmental, social and governance-related business practices.

As you might surmise, how and what a company reports will no longer focus solely on financial metrics like cash flow and margins, but will now include how it contributes to the sustainable economic development of its stakeholders and shareholders (as well as our earth). Going forward, ESG has found its seat at the fundamental analysis table, and the transparency of data and reporting will continue to make policy decisions by our corporate leaders and actively engaged shareholders all the more impactful. Take it from a 3x Hall of Fame guitarist, we can all change the world, and it starts with making the right investment decisions.

Ask me about:

#Environmental, Social, Governance [ESG] #Sustainable Investing #Impact Investing #UN Sustainable Goals #Sustainable Accounting Standards Board [SASB] #Shareholder Engagement