Violation of data privacy. The emissions control scandal. Fake bank accounts created by employees. All are examples of businesses making poor environmental, social and governance (ESG) decisions that bite them in the back.
Watching: What is Esg
If you haven’t heard of ESG investing, you will. Increasingly popular among institutional investors like pension funds, it will become mainstream. In addition to traditional analysis of financial statements and corporate strategy, ESG highlights a variety of factors that typically drive down stock prices.
ESG is not about punishing bad actors or promoting social change. The market is way too efficient to boycott or divest to accomplish anything at all. Instead, it’s about evaluating non-financial factors that are likely to yield returns.
For E, E, that means considering how their environmental impact affects future profits. Do they have enough energy and resources – efficient enough to thrive in an increasingly green-focused world? Or are they big polluters and vulnerable to potential future climate rules? Are energy companies focusing solely on fossil fuels, or are they also diversifying research into renewable energy and emissions reduction?
Similar to the S.S. group Does the company contribute to or devalue society? The market regularly punishes detractors. What is the company’s relationship with its employees? Is there a revolving door between junior workers or management? Top places to work attract top talent. Happy, well-paid workers are more productive and loyal, improving long-term performance. If a migrant worker explodes, so does the stock. Similarly, well-connected businesses in the communities in which they operate appear to be less vulnerable to new local taxes, regulations, and lawsuits. Good community standing also makes it easier to get government permits as time expands.
The relationships are directly related to the core business function. Governance refers to the systems, structures, and policies that govern a corporation – all of which affect profitability and stock market valuation, and should. How competent is the board of directors? How well are they protecting and enhancing shareholder value? Does management act with integrity? Do they offer optimal offers? Reputational risk management? Have a great relationship with managers? A strong compliance culture?
While the ESG label is new, incorporating ESG type analysis in portfolio management is not. My first book, the #1 best-selling investment book of 1984 “Super Stocks,” highlighted many of the factors that are now central to ESG investing. On labor and employee relations, I detail why a great stock has a culture, making employees feel that they are treated with dignity.
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and exist in an atmosphere where constructive ideas from subordinates are encouraged and financially rewarded.
I also stress the importance of paying close attention to the financial controls of the company and the auditors behind them – essentially, protecting it from becoming another Enron. That’s G, G, along with the importance of understanding who controls the company and what a good management/shareholder alignment looks like.
Is ESG Right For You? It depends. A good ESG analysis encourages you or your advisor to assess potential critical factors more deeply. Some advisors regularly incorporate ESG without advertising it. Others push it hard as a selling point. But be wary of overly simplistic ESG strategies. For example, some people will never own the energy stores, fretting about greenhouse gas emissions. However, like all categories, energy stocks sometimes lead and lag behind others. Removing the blanket can mean losing profits in the future. This is supposed to be about analyzing the aspects fully and carefully. You may want energy companies that are developing new technologies and practices to limit emissions while ignoring the environmentally responsible ones of the future.
Ultimately, ESG is about finding stocks with the best potential for growth in an ever-changing, increasingly socially conscious world. It’s like mosquito repellent. You’re not doing it for the smell but for protection.
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Ken Fisher is the founder and executive chairman of Fisher Investments, the author of 11 books, four of which are New York Times bestsellers and the 200th on the list of the 400 richest people in America. by Forbes. Follow him on Twitter
KennethLFisher
The views and opinions expressed in this column are those of the author and do not necessarily reflect the views of.
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Investors can certainly make money through holding socially responsible stocks, said Amy O’Brien, Head of Responsible Investment for TIAA-CREF. O’Brien added that companies create ESG factors – Environmental, Social & Governance – high
