How Socially Responsible Investors View Companies in 2010
How Socially Responsible Investors View Companies in 2010
In the wake of a recovering economy and stock market, how are socially responsible investors viewing your company? Portfolio 21, a 10-year-old mutual fund investing in green companies around the world, recently offered 10 guidelines for investing in 2010.
1. Ecological limits matter. The inevitability of our planet’s ecological limits means that the choices before companies are not about whether they care for the environment, but about the substance and relevance of what they are doing. Dealing with limited ecological capacity is arguably the most important business challenge facing companies in the 21st century, and greenwashing has no place in a company that is serious about its future. It is irrelevant whether a company wants to be perceived as "doing the right thing" or "committed" to environmental sustainability. It is only relevant that a company understands the challenges and opportunities associated with ecological limits and then acts accordingly.
2. Greenhouse gas liabilities are real. Climate destabilization is among the greatest ecological risks we face, and the associated liabilities pose a threat to investors. We believe investors should look for companies that are reducing direct and indirect greenhouse gas emissions as well as decreasing exposure to other environmental liabilities, such as superfund sites, spills, toxic releases, and the fines and penalties associated with these liabilities.
3. Pay attention to the business model. Companies should be adapting their business models to gain competitive advantages within ecological constraints. They need to be deliberately addressing the ecological constraints that are increasingly limiting "business as usual." A positive business model might include products of service, sustainable mobility, local raw materials and/or suppliers, lean manufacturing, and the use of regional manufacturing and distribution.
4. Follow the revenues. One way to discern the difference between a company's green rhetoric and real action is to look at the composition of its revenues. For example, investors should look for companies with rising trends in revenues derived from ecologically superior product lines, evolving green product lines, investments in renewable energy, innovative transportation and distribution strategies, and efficient use of resources.
5. ESG is an integral part of financial analysis. Financial analysis must be integrated with environmental, social, and governance (ESG) issues. After all, financial statements are simply the distillation of a set of decisions that are made in the context of a web of factors that are driven primarily by human behavior. And, as we know intuitively, and as behavioral economists are proving, human behavior is not always rational, nor is it driven by a single factor. We are complex creatures, business is complex, and financial success is complex. It is imperative to consider all of the factors that might be driving the financial performance of a company.
6. Qualitative, fundamental analysis goes hand in hand with long-term investing. We believe there is an advantage for long-term investors who spend a lot of upfront time understanding a company and its business before investing. An easy way to determine whether a manager is matching behavior with rhetoric about long-term investing is to look at the turnover rate of the fund. This number will tell you how often the securities in the fund are replaced with new positions. For example, a turnover rate of zero means a fund literally buys and holds. An annual turnover rate of 100% means the fund replaces every security in the fund once a year. A long-term manager will tend to have low annual turnover rates.
7. There is no Federal Reserve or lender of last resort for natural resources. As the financial crisis unfolded and huge institutions imploded, the response from policymakers was to print money. It's as if, when faced with the most serious economic crisis since the 1930s, the answer was, "There's an app for that." Print and borrow money, dole it out, and increase the national debt and budget deficits. Unfortunately, while it is possible to borrow money, at least for a while, there is not another set of ecosystems from which we can borrow ecological capacity.
8. Awareness and action are on the rise. The relentless flow of scientific verification of global climate change, an administration that actually acknowledges this reality, growing awareness on the part of business and the public-all have been contributing to big increases in flows of money to investments that focus on environmental issues and opportunities. During our 10 years, Portfolio 21 has experienced positive net new money (deposits minus redemptions) in every month except one. That's an impressive record for a mutual fund, especially during the past year, and illustrates the increasing demand for green investing.
9. Father does not always know best. For once and for all, let's set aside the outdated illusion that a bunch of financiers on Wall Street really know best about everything. The fundamental economic principles underlying the risk and return assumptions governing Wall Street have changed little since World War II, yet the world is completely different today and faces a whole new set of challenges and opportunities. It's time to listen to Mother Earth.
10. The future is now. Ecological limits are not going to happen someday. They are here today, and they were here yesterday. It is too late for us to reverse global climate change. There are thousands of worthy organizations and individuals working diligently to roll back the tide of human destruction of the environment, but no matter how hard they work we are at the point where we are striving to make things "less bad" or "less disruptive." While this may seem negative, it’s the truth as we understand it. From an investment perspective, we cannot afford to be in denial or hope and wait for a technological solution to solve the ecological crisis. Investment strategies must manage ecological risks and opportunities.
“In summary,” offers Portfolio 21, “there is an enormous opportunity for companies to save money by saving natural resources and prosper by providing the products, services, and technologies that are needed to create a sustainable society. We believe the business and investment case for environmental sustainability has become increasingly clear, and the corporations that are embracing it are strategically positioned to prosper in the 21st Century.”