Why you should consider ESG when making investment decisions.
We know choosing a super fund or investment product is daunting. There’s so much to consider – how much to invest, your risk tolerance, how long you’ll be investing for, the fees and charges you’ll be paying, what you might expect in the way of returns and what kind of adviser relationship you want during the journey.
Amidst all these important factors, it’s easy to overlook one pretty major consideration – what do you actually want your money to be doing? Are you interested in Responsible Investing (RI) and want your dollars doing good? Maybe returns trump all else? Is it possible to achieve both?
If you’ve met the team at Kearney Group, you’ll know sustainable ESG investing is a topic that’s near and dear to our hearts. It’s why we’re pretty serious when we say: whether your goal is great returns OR to be a responsible investor, you should be seriously looking into your fund’s ESG performance when making investment decisions.
Why should you consider ESG in your investment decision-making?
Understand true, long-term value.
There are now mountains of evidence linking ESG performance with financial success and enduring relevance.
Harvard Business School has been doing some incredible work on this topic with their Impact-Weighted Accounts Project; an initiative which looks to add social and environmental costs to a company’s balance sheet, in order to determine true profitability.
By appropriately accounting for these traditionally ‘non-financial’ costs, we’re able to see how EBITDA (total profit) in isolation isn’t a sufficient gauge of value. And, an impact-weighted lens reveals many “profitable” companies are actually racking up social and environmental costs that exceed their total earnings.
Harvard recently published the environmental impact of 1,800 companies analysed by their Impact-Weighted Accounts Project. They found that of the “1,694 companies which had positive EBITDA in 2018, 252 firms (15%) would see their profit more than wiped out by the environmental damage they caused, while 543 firms (32%) would see their EBITDA reduced by 25% or more.”
Additionally, Harvard’s data reveal entire industries (think airlines, paper and forest products, electric utilities, construction materials, containers and packaging) in which almost all participants would see more than a quarter of their EBITDA wiped off the balance sheet if they were appropriately accounting for their environmental impact.
The next phase of their research (due out in 2021) will look at cost of product and employment practices, in order to provide a more complete picture of impact and value. But what the research is already telling us, is that factoring ESG into your investment decisions is actually a crucial step in determining the true value of a company or investment. And, if we’re to assume that one day, this cost will surface, it’s also a crucial indicator of long-term value.
In short, doing the right thing is also in your best interest, financially-speaking.
ESG screening also alerts us to companies with bad underlying practices and helps us avoid risk.
Think BP, Volkswagen and Equifax. What do these companies all have in common? They’d all been sounding ESG alarm bells for years.
BP had well-documented and recurring health and safety issues way before its Deepwater Horizon oil rig exploded in the Gulf of Mexico.
At Volkswagen, culture was notoriously rotten and the company’s governance scores had fallen sharply in the lead up to its emissions scandal.
Same goes for Equifax which had been flagged for data privacy and cyber security concerns before its colossal data breach and subsequent insider trading controversy.
Though poor ESG performance does not a scandal make, as a predictive indicator of risk, ESG is already being used by major ratings agencies and research houses – so much so that ESG data providers had downgraded all three companies before their spectacular crash-and-burns.
BP was downgraded for failing to address a series of smaller accidents, while Volkswagen was removed from ESG indices months before their emissions scandal broke for separate regulatory and labour practices. Equifax was downgraded over cyber security concerns nearly 2 years before their infamous data breach.
Beyond alerting us to danger, ESG also just allows us to do a little bit of good (or at least, lessen harm) in the world. It allows us to put our money where our mouth is and meaningfully support the best performers, new ideas and emerging industries.
In summary, and as our CEO, Paul Kearney put it in his recent Q&A on everything you need to know about ESG investing:
“From a human perspective, considering ESG is a good thing to do. From an investor’s perspective, considering ESG is the strategic thing to do, financially-speaking. From a financial adviser’s perspective, considering ESG is, quite simply, our job.
If ESG has direct financial relevance, can be predictive of risk and reveals true long-term value, then failing to provide ESG analysis on investments is failing our moral obligation to our clients and our community.
Because – what good is a ‘good return’ now, if it comes with such an enormous future cost? What good is retiring early, if when you get there, you can’t breathe the air or drink the water or the society you retire to has become dangerous or unlivable? What good is abundance now, when it comes at the expense of our ability to live well into tomorrow?
These are big philosophical questions. And we believe ESG can be part of the answer.”
Making the switch to an ESG investment fund.
We’re not just pulling data out of our hat. We actually know that most of you want to walk your talk. People are deadly serious about climate (in)action, social justice and corporate responsibility. In fact, we know 80% of you are willing to switch super or investment funds if you find your fund doesn’t align with your values (88% of you who are aged 18-35).
But how do you know? Who do you ask? Where do you find a better option? And how do you make the switch?
We answer these questions, and more, here.
And, if you’re looking for a fund that won’t cost our future, check out Ethos Managed Portfolios.
Know the lingo.
What’s ESG investing?
In short, ESG investing is a type of sustainable investing that explicitly and systematically takes into account environmental, social and governance (or ESG) performance, as part of the investment decision-making, selection and monitoring process.
ESG is considered not only because these feel-good factors are ‘nice to have’ but because they’re also pretty reliable indicators of long-term value and can even help us avoid risk.
You can learn more here.