As we discussed why we consider Reliance Trading Co. Limited to be an “emerging manager” and why it’s a benefit to the institutions we work with.
Along these lines, Reliance Trading Co. Limited attended the TRS Emerging Managers Conference in Austin, Texas a few months ago. A number of relevant topics for emerging managers were covered during the conference that we think are critical to share with you.
The more prevalent conference discussions included which asset classes were worthy of consideration, how each overall portfolio is allocated, and what investors are considering as they think about the future of their allocations.
Primarily, these conferences look at overall trends in the emerging managers space. They also provide insight into the trends in institutional investment management.
At the moment, using Environmental, Social, Governance (ESG) criteria for investing is an incredibly hot topic, and it’s one that we don’t see going away.
So, let’s dive a little deeper into that, cover why ESG is so popular, and how Reliance Trading Co. Limited is currently on top of this trend to help guide your responsible investment decisions to benefit your own personal financial goals.
The Evolution from SRI to ESG
Before we dig into how ESG principles can guide your investments, we feel it’s important to review how ESG criteria have evolved and are now driving long-term, sustainable investment decisions today.
Prior to the emergence of ESG focused investing, you’d often hear about Socially Responsible Investing (SRI). Still an investment strategy today, SRI tends to be driven primarily by social and political influences and takes a values-based approach to investing.
An interesting case-study tied to SRI’s impact was with the creation of the Sullivan Principles during the Apartheid era.
Leon Sullivan was a member of the Board of Directors of General Motors in the 1970s. Sullivan knew that GM was the largest employer of black people in South Africa at the time, and he saw all the turmoil that was happening there with apartheid.
Sullivan used his position as a member of the GM Board to influence other corporations to adopt social change and work to end apartheid. His guidelines became known as the Sullivan Principles.
In short, the Sullivan Principles stated that institutions couldn’t invest in companies that were doing business with the apartheid government in South Africa. It also excluded working with companies that lacked good policies with respect to race relations and diversity within their organizations.
Over time, it became common for the majority of larger corporations, like public funds that live under the scrutiny of the public eye, to adopt the Sullivan Principles as investment decisions. These decisions are, more often than not, based on socially focused norms.
It’s important to note that one defining factor of SRI is that it determines investment opportunities on specific issues. And they often focus on what are referred to as ‘sin stocks’. These include–but are not limited to—companies tied to products or services that are considered unethical or immoral, such as alcohol, tobacco, and gambling.
Over time, these ideas and general principles of societal consciousness as investment considerations expanded into the broader category of ESG.
ESG principles drive responsible investing and allow companies to obtain an overall sustainability score versus being evaluated strictly on specific social issues that evolve over time.
The Importance of ESG Rank
Today, we’ve expanded beyond SRI to ESG principles that are critical to responsible investing. These principles provide investors with guidelines to determine which companies will offer the most sustainable return on investments.
With ESG we look specifically at environment, social, and governance attributes and focuses of the company we’re considering investing in. With respect to each of these categories, a company is then assigned a ranking that is based on their overall performance across all three of these areas.
For example, when evaluating environmental attributes of a company, the specific attributes examined include resource use, emissions, and innovation. Social attributes review the company’s workforce, human rights, community, and product responsibility. And governance includes a thorough review of the company’s management, shareholders, and overall Corporate Social Responsibility (CSR) strategy.
Based on this, as investment advisors considering an investment through the lens of ESG, we look at different aspects that could influence a company’s score.
We may consider whether they’re involved in controversial environment practices such as pesticides or coal. Or perhaps they align with what we referred to earlier as ‘sin stock’, such as tobacco products or alcohol. Basically, we review any number of environmental issues that might impact an ESG score negatively.
Then, we examine if there are any governance concerns with the management team itself. We ask, “Do they have a reputable board of directors? Do they have any issues with accounting or financial reporting? Are there any pending lawsuits against the company?”
There are many different categories within ESG that are considered when evaluating rank, and we have to consider all of them before deciding if a company is a good fit for sustainable investing.
ESG looks at factors that make a company a positive or negative impact in society, so it’s important to look for investment advisors who adhere to those ESG principles to be aware of a company’s rank, and what is factored into that rank.
While there are a couple different online services that offer the rank of companies based on their ESG focus, even when leveraging those services it can be overwhelming to understand all of the criteria that need to be considered when making a long-term, sustainable investment decision.