In the past few years a lot of interest has popped up around sustainable investing (also known as socially responsible) but many people don’t know what exactly this means or where to start. As the sustainable investing market grows so too does the complexity surrounding the nuanced approaches and ever evolving creation of often confusing names and information. To help our clients navigate this process we have built portfolios that follow a sustainable investing process using environmental, social, and governance (also known as ESG) frameworks.

What is Sustainable Investing?

In our society we believe that most corporations provide a net benefit through their products and services, job creation and overall behavior. As a responsible investor our ESG portfolios seek to invest in companies that balance the needs of financial and nonfinancial matters and demonstrate a commitment to the rights of individuals, communities and the global good.
 Our ESG portfolios seek to identify companies that operate in a manner consistent with the following:

 

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Environmental

air and water pollution
biodiversity and deforestation
climate change
carbon emissions
energy efficiency
waste management
water scarcity

 

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Social

community relations
customer satisfaction
employee engagement
gender equality
diversity policies
human rights
labor standards

 

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Governance

audit committee structure
board composition
bribery and corruption policies
executive compensation
lobbying activities
political contributions

 

 

Commitment to these principles generally excludes companies that involve the following:

  • Developing genetically-modified organisms for environmental release without balancing social benefits
  • Manufacture, design or sell weapons, firearms or ammunition
  • Abuse or cause unnecessary suffering and death of animals
  • Manufacture tobacco or alcohol
  • Involvement with gambling operations
  • Demonstrate poor environmental performance or compliance records and contribute significantly to environmental problems
  • Exhibit a pattern and practice of human rights violations

Performance of Sustainable Investing

Responsible Investing doesn’t mean giving up on investment return. Research suggests that companies with high scores for their environmental, social and governance (ESG) commitments tend to have better management, higher expected growth and lower cost of capital — which may translate into better financial results for investors.1

For example, initiatives to reduce and reuse waste, improve energy efficiency or conserve natural resources can produce savings that flow to a company’s bottom line. As the chart shows, companies with strong ESG scores significantly outperformed those with weak scores.2
 

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The chart above illustrates the author's analysis of a large number of U.S. stocks from 1993 to 2014, ranked on the strength of their ESG commitments. The stocks were grouped into the top 20% of the universe (top ESG score) versus the bottom 20% (bottom ESG score).

1 Source: George Serafeim, "The Role of the Corporation in Society: Implications for Investors," September 2015. 
2 Source: Adapted from Khan, Mozaffar and Serafeim, George and Yoon, Aaron S., "Corporate Sustainability: First Evidence on Materiality," (November 9, 2016). "The Accounting Review," Vol. 91, No. 6, pp. 1697-1724. Available at SSRN: https://ssrn.com/abstract=2575912 orhttp://dx.doi.org/10.2139/ssrn.2575912. Past performance is no guarantee of future results. Data is for illustrative purposes only.