“How you spend your money is how you vote on what exists in the world.” – Vicki Robin
If I asked you what you can do to make things better at a global level, what would you say? A few obvious things come to mind: vote, protest, donate, serve, volunteer. I would venture to say most of us do some of these things but are still left with a desire to do more. As we watch our leaders struggle to get things done, we wonder how we can make a difference. It was this feeling that inspired us at TAAG to explore a new element of investing.
Our investment portfolios are the largest source of money, and thereby power, that we control yet we rarely consider how that money is being used. Sustainable investing means thinking about just that and purposefully investing our assets in companies that are making a positive impact on society.
What is sustainable investing?
- Sustainable investing is when investors buy the stocks, bonds or mutual funds of companies that have desirable business practices specifically related to environmental, social and governance (ESG) factors. As shown in the chart below, sustainable business practices influence the way a company interacts with its customers, its employees and its leadership as well as how it impacts the environment, the community and politics. Using information that companies report on their practices, investors can identify which businesses are demonstrating the greatest commitment to ESG issues and invest their money accordingly.
How is it measured?
- Companies are given an ESG score which is based on 60 to 80 criteria in each of the ESG categories. They receive a score for their environmental practices, social practices and governance practices and the three scores are aggregated together to determine the overall score that ranges from 1 to 100 (the higher the better). Companies also receive a Controversy score (the lower the better). Instances of things like human rights violations or egregious air or water pollution would increase a company’s controversy score.
- E: Factors that influence a company’s environmental score include their carbon emission intensity as compared to the industry average, whether they have a greenhouse gas reduction program, a renewable energy or biodiversity program and whether they have been assessed any environmental fines.
- S: Social parameters include a company’s policies with respect to things like discrimination and diversity, safety in the workplace, involvement in the community and human rights.
- G: A firm’s governance score is influenced by factors such as the independence and gender diversity of their board and whether they have policies around things like bribery, corruption and political involvement.
Why is TAAG focused on sustainability now?
- Until recently, ESG information was only available for individual companies. Since mutual funds invest in hundreds or even thousands of companies, it was practically impossible for a firm like TAAG to compare the sustainability of one mutual fund versus another. The only way we could help our clients invest in sustainable companies would have been to choose a mutual fund whose express purpose was sustainability. Unfortunately, those types of funds only make up 2% of the entire mutual fund universe and investing in them often means compromising in areas like cost or diversification.
- As demand for sustainable investing has grown, the industry has developed tools to help compare the sustainability of one mutual fund to another. Because this data is available on a much wider scale, we can now create a portfolio that doesn’t compromise quality, cost or diversification.
How is TAAG building sustainable portfolios?
- Our investment philosophy remains the same as it has always been. We continue to believe the best portfolio is one that has:
- Appropriate asset allocation (the split between stocks and bonds) based on factors such as risk tolerance, risk requirements and time horizon
- Sufficient diversification into multiple asset classes and spread across thousands of companies
- Minimal cost and
- Emphasis on dimensions of return that have been shown to add value over time
- Using these requirements as a base, we explore the universe of available mutual funds. If we find two funds that comparably meet the needs of the portfolio, we will select the fund with the higher sustainability rating. We are specifically targeting funds that have a high score with respect to the environmental aspect of sustainability; however, we have found that most funds that emphasize the environment also have strong scores on the social and governance factors as well.
What can you expect to gain from a sustainable portfolio?
- While there is research that indicates companies with high sustainability scores provide superior risk-adjusted returns, it’s likely too early to tell the long-term impact of ESG factors on performance. Based on the historical data, the expected return, risk and cost of our sustainable portfolios are comparable to our traditional investments. In other words, you won’t have to meaningfully increase your risk or cost in order to invest in companies who have a positive impact.
- In a sustainable portfolio, more of your money goes to companies that have better track records and better policies for dealing with the most important environmental, social and governance issues of our day. By actively investing in sustainable companies, you send a message to other corporations that there is an incentive to adopt these best practices. If businesses must adopt better ESG policies in order to access investor capital, it’s likely that they will.
- In a capitalistic society, we vote with our cash. We might choose to eat cage-free or farm-raised food or we might refuse to shop at a certain store. We now have the same consumer power in our investments to say no to companies who aren’t doing their part to build a better society. Best of all, we can do that without sacrificing our own financial well-being.
How is TAAG implementing sustainable portfolios?
- As with any other recommendations we make, we will consider your individual situation before making any changes to your portfolio. We plan on discussing this with you in future communications and in meetings. In the meantime, if you would like to learn more about sustainable investing with TAAG, don’t hesitate to reach out to Jeannette, Chip or myself for more information.