Investors today hear a lot about ESG, or environmental-, social- and governance-based investing. Is that different from socially responsible investing or values-based investing? No, it is just a battle of vocabulary. I think that ESG has a precision to it that appeals more to conventional analysts on Wall Street. But we all make selections as to what to invest in based on people and the planet.
The criticism of this kind of investing for years has been that you’d have to sacrifice returns. What’s your opinion? It hasn’t been borne out by the facts. Embedded in that assumption is the idea that you should try to have as big a selection of investments to choose from as possible to maximize performance and that restricting yourself to ESG choices will limit returns. But every single small-cap portfolio manager invests only in small-cap stocks and still promises to outperform. And every single value portfolio manager invests only in value stocks and still promises to outperform. So I feel that there’s a different set of rules when it comes to our investing in ESG companies.
Imagine I am comparing two companies in the same industry. The first has a lot of product safety recalls, and the second one doesn’t. By investing in the second company, I’ve avoided trouble. That’s rule number one for making money: Avoid trouble.
Looking at a company’s potential from an E, S or G lens, which of those offers the most promise from an investment standpoint today? I think the S is most important because it involves such a broad set of issues. The social lens evaluates how the company interacts with stakeholders, including suppliers, customers, employees, communities and shareholders. Does a company have problems such as child labor in the supply chain? Does it provide training for its workforce? These kinds of questions help us understand the quality of management. I think every conventional investment adviser would agree that management quality is the most difficult thing to assess when you’re analyzing a company.