EEA YouTube Show: Impact Investing Is Not a Tradeoff
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This Enterprise Engagement Alliance live YouTube show on is for investors, portfolio managers and business leaders interested in a more concrete view of the results of impact investing. Does consideration of environmental, social, or governance (ESG) issues represent an opportunity or a trade-off?
Click here to watch or listen to the 30-minute show. Panelists are:
Jason Britton, is a senior financial services executive, adjunct college Professor of Finance at Charleson College, and Chief Executive Officer of Charleston, SC-based Reflection Analytics Co., which provides investors with a “focused rating that scores companies across 18 ESG sub-themes and offers asset managers the ability to ensure continuous compliance.” He is also a Professor of Finance at the College of Charleston. Reflection Analytics is a new ESG rating platform that aims to improve the quality of sustainability ratings by considering 75 different factors, including the donations by companies and management through data provided by Goods Unite Us, below.
Brian Potts, Partner, Husch Blackwell, a corporate law firm “with a people focus”; Founder of InsightsAlign.com, an application that tracks corporate political spending by candidate and causes, and of a related company that creates ETFs (exchange-traded funds) based on political leanings and causes. (See ESM: Goods Unite Us App Exposes Where Public Corporations, Executives Put Their Political Contributions.)
Key Findings
- Organizations with high levels of customer, employee, supply chain and distribution partner and community engagement with sustainable environmental practices will outperform by a factor of 2% to 4% a similarly weighted portfolio in terms of market sector, performance and other key business performance factors. The primary reason: They have higher sales and profitability because customers like their products and services; they have lower costs and higher quality because employees are engaged in their missions. Supply chain and distribution partners are more willing to help out because of their loyalty. There are lower risks because they are welcomed by the communities in which they operate and because they practice sustainable environmental practices.
- At great companies, workers buy into the company’s mission and culture. They support it, they are wholly invested. Customers know the company culture, its values and whether it speaks to them or not. They're invested too. It's all about organizations investing money on where the relationships really count in terms of long-term productivity, quality, loyalty, innovation, etc.
- States such as Texas or others that ban ESG considerations by public pension and other government funds are costing their tax payers not only a significant advantage in enhanced stock performance but also higher underwriting fees because of major banking underwriters pulling out of states with such laws. “It seems silly to me and frankly anti-American,” says Potts, who is also an attorney. “If competitive data is available about companies, investors should be able to access that data when making investment decisions. The idea of banning anyone from using data from making investment decisions seems foolish.”
- The stocks in companies that donate primarily to the right or left can both outperform the market if they score well in other human capital and business factors, notes Britton. In fact, both the company’s DEMZ ETF (exchange-traded fund) is performing similarly to a mock GOP ETF it hopes to formalize soon into a marketable product, without both outperforming their benchmarks. However, of two funds that are equally weighted in terms of sectors, the one dominated by donors to Democrats is outperforming the one dominated by Republicans. (Note: Reflection Analytics helps investors create portfolios based on any political leaning of its clients.)
- There are both Democratic and Republican companies that have reached the same conclusion about the benefits of stakeholder management practices, even if coming at the subject from different directions.
- The ESG movement was in part set back by the poor standardization of current sustainability metrics, which in some cases go back decades. “How do people understand ESG standards when one might include Exxon Mobile or Tesla, and another specifically exclude both of them?” (Britton’s company hopes the 75 transparent metrics used in its process will help mitigate this issue.)
- Almost every CEO learns in school that their employees and customers are their No. 1 assets, and yet almost nowhere do they appear on financials based on GAAP (Generally Accepted Accounting Practices), unless a company is sold. For the most part, people are carried as liabilities and expenses on the balance sheet. So, neither the CEO, banks nor investors see almost any human capital data that could yield an obvious alpha or present a risk in terms of performance.
- No matter how well run a company by stakeholder management standards, no organization is immune from market, demographic, economic, climatic, regulatory, safety, or other risks that can affect performance, although such practices may make them more resilient and innovative. ESG factors are just another way to find nuggets in an investment portfolio. If you have the right investment manager, you can outperform the market based on almost any political values you seek to emphasize.
- Stakeholder management isn’t just about paying employees a living wage. It’s managing an entire system of interrelated stakeholder issues toward a common purpose. Investing in communities isn’t corporate social responsibility, it’s helping to create an environment in which stakeholders thrive, thereby making them more productive, loyal, and healthy customers, employees, and other stakeholders.
- Analyzing stakeholder management includes an analysis of the organization’s vision, how it treats its customers, employees, and other stakeholders and the environment; its ethos and ethics, their governance practices, and how they manage their supply chains and distribution partners.
- US ETFs claiming to use ESG criteria in their investment portfolios have one more year to comply with the updated Securities & Exchange Commission Name Rules, which require them to clearly explain the basis upon which they select the stocks in the portfolio and to ensure that at least 80% of the stocks selected comply with such criteria. Reflections Analytics is targeting its new ESG evaluation platform in part to help ESG-oriented ETFs comply with the new regulations.
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1. Professional Education on Stakeholder Management and Total Rewards
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