Why the Socially Responsible Investor is also a Responsible Investor
A responsible investor is one whose portfolio is managed in a prudent and efficient manner considering his or her long-term goals, needs, and aspirations. This means his portfolio is fully diversified in a broad array of asset classes using well-suited mutual funds, ETFs, or individual stocks and bonds that fit his risk profile.
Whether the portfolio is indexed, tactically managed, or actively managed, the responsible investor, has a plan in place for how to respond to both bear market and bull market alike. A bull market, for example, does not incite greed, while the 'bear' does not incite panic. Last, the responsible investor is focused on long-term returns, that is periods of time greater than 3-5 years, not daily or monthly vagaries in the market.
Historically, there has been a sense that the socially responsible investor is not a responsible investor. In this line of thought, the socially responsible investor has put an emotional or ethical desire, that is, say, environmental conscientiousness, above the desire for profit.
However, this has become a highly inaccurate statement. In fact, many are starting to conclude that ESG investing, which screens companies for environmental, social, and governance risk factors, is becoming the most responsibleway of investing.
For example, Abdur Nimeri, senior investment strategist for FlexShares ETFs, argues that ESG-optimized investments should constitute the core of well-managed investment portfolio (WealthManagement.com).
Additionally, we are learning that investing in companies with positive ESG characteristics may improve investment returns over time, and at the very least do not result in lower return prospects. We wrote more about that in a previous blog post which you can find here.
This is important because the socially responsible investor now has data to show that she is not sacrificing investment return for a moral good. Rather, she is investing in a way that honors both her return prospects and her social consciousness. In other words, socially responsible, or ESG investing, is shifting from an esoteric pursuit for hippies and idealists to a mainstream definition of what it means to be a responsible investor (Editor's Note: We love hippies and idealists).
The Future of Socially Responsible Investing
We have a theory at Trailhead Planners that sustainable investing, or socially responsible investing, is only going to become more important over the coming decades. As our global interconnectedness grows and we confront looming problems like global warming and income inequality, companies that do not respond to social and environmental change will fall to the wayside.
For example, in a world where consumers are more informed and connected, factors such as how a company treats its employees both domestically and abroad have greater importance. For example, should a scandal arise regarding the ill-treatment of foreign factory workers of a large consumer goods conglomerate, the media and social media backlash could be extremely detrimental to the company's brand in today's interconnected world. Nike went through a similar scenario in the 1990s, and we suspect it would be much, much worse today as consumer preferences, social-consciousness, and awareness have evolved dramatically.
On the other hand, companies themselves are taking stances on environmental policy. For example, Apple just announced that 100% of its operations are run on green energy, an incredible achievement for the largest and most profitable company in the world (FastCompany). However, we all know that Apple outsources much of its assembly and manufacturing to other businesses, like Foxcom in China. Are these companies environmentally sustainable? How do they treat their workers? Should they even be considered separate businesses or are they just extension of Apple?
The article notes that Apple is taking its supply chain very seriously. Here's the quote:
The truth is Apple has plenty of leverage to push its suppliers toward renewables. Particularly since Tim Cook joined the company to oversee operations in 1998, the company has been known for being a hard-nosed negotiator and a demanding customer. Now it’s throwing its weight around in the interest of protecting the environment.
I asked Jackson to describe how Apple goes about persuading a supplier to switch to renewable energy, and she was blunt. The conversation, she says, might go something like “Hey this is something that’s becoming increasingly important to us, so get a leg up on the person that’s going to try to get this business away from you. Clean up your power act now.”
In other words, to do business with Apple in the future, the percentage of a company's operations used by Apple must be run on green energy. In effect, there are very real business consequences to not taking sustainability seriously.
Why? Because it is important to Apple. And why is it important to Apple? Because it is important to their customers as well as their workforce, executives, and board of directors.
Situations of consumer and company activism are becoming more and more common. Outside magazine wrote of this development as it delved into the wool supply chain of Patagonia. Patagonia, of course, is a company known for its environmental consciousness and activism; however, it still still needed to make very serious upgrades to its supply chain amidst consumer criticism.
For a company like Patagonia, that wins consumer purchases because of its social activism and environmental stewardship, questionable wool sourcing proved detrimental and subjected the company to harsh criticism. To not amend this problem would have been brand suicide.
Of course, this is a microcosm of our larger business environment and gets us back to main point of this article: ESG factors are becoming more important to business longevity in a very real dollars and cents manner.
In effect, we at Trailhead Planners believe that ultimately, investing according to Environmental, Social, and Governance factors will be become the only way to invest responsibly.
To end, the socially responsible investor is a responsible investor. To say anything different would simply be irresponsible.