As a family office, we naturally have a keen interest in the sustainability of life and the planet we depend upon. After all, it is all about the future generations. And it seems we are not alone. Investments in companies that have a so-called “ESG” classification (Environmental, Social and Governance) is estimated at $20 trillion (Forbes). This is a good thing, and the hope is that with more and more investors seeking out companies that behave responsibly, the impact will be felt directly at the corporate level and induce change for the benefit of all.
However, from a purely capitalistic view (e.g. we also want to make money), it begs the question: is it worth it? The first thing we noticed when exploring this a bit more closely, is that many people mean very different things, when it comes to saving the planet. The afore discussed ESG classification uses environmental, social and corporate governance factors when measuring the sustainability and ethical impact of a business. But that also means that you could have a company that pollutes the planet to no end, yet so long as it treats its employees fairly, it will be part of the ESG universe. Conclusion number one is hence: you can’t really rely on such a broad definition if you really care about the environment, for example.
The second thing we noticed, is that very few companies are pure plays, e.g. they are either all good or all bad. For example, is Tesla a good corporate citizen because electric cars emit less pollution? Or is it a pending disaster for the future, when we have to dispose of millions of toxic batteries? And unless all the employees walk to the office (made from locally sourced bamboo), and flush their organic waste with rain water, any business will have some negative impact on the planet. So, conclusion number two, no matter how hard we try, we will need to make compromises in how we define our investment criteria.
Putting it all together, we wanted to see if we could create a narrower definition of what we believe constitutes a good versus a bad company in this context. Funnily enough, it was a lot easier to define companies that are bad, appropriately called the “Vice” index and includes the sectors: alcohol, gambling, firearms, tobacco and cannabis. The “Nice” index, on the other hand, was much more difficult, mostly because we had to take a view on new technologies and the expected impact the company will have in the future. We included the sectors: renewable energy, pollution control, recycling, education, and sustainable food. How have they performed relative to one another? Vice wins it easily, having outperformed by more 77% over the last four years. However disappointing that may be, the Nice index did have a lower volatility and things could also change dramatically in the future. For the moment though it seems very clear that, “nice guys finish last”.