With regards to responsible or sustainable investing a client recently asked me: Are you recommending this investment for moral purposes? He wanted to know if he would be sacrificing a good rate of return for doing the right thing.
Maybe in the past that might have been a concern but today the opposite is true.
First of all let us establish the background to this discussion. There are many terms to describe sustainable or responsible investing. In the past the focus was on excluding companies that made their money on weapons, or tobacco, or even non renewable resources. The term green investing was a narrow definition that, especially in Alberta got a negative connotation.
But sustainable or responsible investing is all encompassing. Let’s give it our own definition: It is investing that seeks to leave the planet in a better condition for future generations by dealing with the issues of resource management and the challenge of population growth. It is investing that has a long term focus and seeks to reward productive company behavior.
With respect to Environmental, Social, and Governance(ESG) the investing public probably has a good idea of what the E and S represent. When you read news articles on the polluted ocean or child labor in developing countries that would fall under the E or S. But this blog post will discuss the G for governance. Responsible investment companies are beginning to use their power as shareholders to influence company behavior for the better. And data is being compiled that show the companies with good governance outperform the companies that behave in an unethical manner. Sometimes the term impact investing is used but let’s not get hung up on phrases.
Governance involves such topics as executive compensation, risk management, independence of boards and directors, combined CEO and chair role, business ethics.
The bigger the shareholder the more sway they have on company management. Companies take note. Investment firms that have clout can get a company to change. So even companies that are in sectors that most people would think don’t belong in a sustainable investment category could be chosen if they are open to improving their governance. An example of this is Walmart, who even 5 years ago would have been an untouchable candidate. But they have responded to shareholder concerns in a positive way with respect to worker rights, pay equity, and supply chain monitoring.
Closer to home a sustainable investment firm in Canada expressed concern that Dollarama’s board lacked diversity. When a majority of Dollarama’s customers are women, shouldn’t they be represented when developing company policy? The firm was successful in getting Dollarama to change the board composition.
Companies with good governance practices will avoid share destruction. Think Volkswagen, Wells Fargo, Equifax or Home Capital. In the age of the internet bad behavior will get busted sooner rather than later. Sustainable investment companies that use due diligence focus on good or bad governance will provide value to their investors. It is risk mitigation which does contribute to a better rate of return. And you have the opportunity to participate in this.