ESG (Environmental, Social and Governance) and SRI (Socially Responsible Investing) are themes that are becoming more prevalent in the investing world.  As a firm, we at Atlas recognize this, and have developed a considered approach to the issue.  In doing so, we aim to maintain the ability to generate competitive returns for our clients while also investing in a manner that is consistent with the social and moral responsibilities of a developed and insightful culture.

What is ESG/SRI?

The acronym “ESG” stands for Environmental, Social, and Governance. “SRI” denotes Socially Responsible Investing.  ESG has become a commonly discussed issue in the investing arena, while SRI has not received as much attention recently.  In this article we will discuss our approach to ESG analysis, which aims to evaluate the economic value of the three principles in a portfolio.

A short background on ESG Investing

A few decades ago, the original ESG/SRI investing methodologies were established, and focused primarily on the approach of screening out unacceptable investments that may violate the standards of concerned investors.  This selective screening approach was used by a few mutual fund companies who were pioneers in the ESG market.  Their success in marketing these funds was limited, perhaps due to the fact that they largely underperformed their unrestrained peer’s investment returns.  This approach did however, allow investors to “feel good”, and has thus been labeled by some as the “feel good approach” to ESG investing.

More recently activist investors have evolved the process of ESG investing, and are more aggressively engaging in taking on corporate governance issues and pursuing investment opportunities in areas that promote socially and environmentally progressive ideals.  Significant movement has been made in affecting the management approaches and business strategies of companies, however the process can be a combative one resulting in negative impacts to investor interests in the short term.  This process has been characterized as a “do good approach.”

Concurrent with the otherwise changing landscape in ESG investing, some market forces are changing in a way that has created attractive opportunities for investors to pursue their ESG ideals without using a selective screening approach or personally engaging in activist activities.  More and more companies are pursuing socially and environmentally responsible business and governance strategies, if not for altruistic reasons, for the evolving profit opportunities.  Assets are flowing toward certain areas that fall within the scope of ESG opportunities.  Examples include the growth of the renewable energy space, flows toward companies that have promoted sound governance principles and companies that focus on certain growing social groups.  This strategy of identifying ESG opportunities that focus on the cultural and consumer driven changes endemic in the market can be referred to as the “do well approach.”  

For the committed ESG/SRI investor, there may be considerations of personal investment philosophy that can impact the security selection process. Unfortunately, no two investors are likely to hold the exact same set beliefs and principles over time. Consequently, developing a single set of criteria for ESG/SRI security selection using the selective screening approach is unlikely. But, by working with clients and aiming to identify their personal preferences in approach, we can look to develop pragmatic approaches to meeting their needs.

Considering the history of the approaches to ESG/SRI investing, we can perhaps simplify the models along a continuum as illustrated below.

The Feel Good (or screening) approach – To some individual investors, this approach appeals primarily due to the idea that it avoids unacceptable investments, thus allowing them to “feel good” that they’re not supporting objectionable activities.  From a moral or social position, this can be satisfactory, however it often overlooks specific issues that may be important to the investor such as the opportunity to support companies that are pursuing new strategies that contribute to improved social, moral or environmental outcomes (Do Good).  Some ESG/SRI investors have an interest in encouraging and promoting positive change by investing in it.  Unfortunately, the available screening processes can overlook certain issues (such business relationships with other companies that do not follow acceptable ESG/SRI principles) and eliminate opportunities for the investor to support progressive change in the business community.

The selection of securities is a matter of developing criteria, subjective evaluation or personal beliefs regarding selective screening vs. progressive investing.  The veracity of an investment for a particular criteria is typically not found with a shallow screening or analysis approach.  To identify appropriate investment opportunities takes labor, investigation and a bit of subjective decision making.

By way of example, we can look at the results of a simple screen conducted by one of our partners recently, which illustrates the conundrum.

To be sure, the screening process can be particularly difficult in the energy sector.  An electric utility company in the U.S. has been known over the last several years to be the leader in the industry in reducing coal usage and emissions (low ash coal), while making meaningful advancements in the use of renewable energy production sources, primarily in the area of solar.  In addition, the company has adopted rather advanced governance and human resource policies.  Presumably due to the history of the company and its continued use of coal, it screened out of eligibility for some ESG funds.

In contrast, another electric utility passed all ESG screening.  The utility buys electricity from an energy producer that makes substantial use of windfarms.  This electricity producer has regularly faced scrutiny and lawsuits over charges that its windfarms are harmful to any number of native species.  Some investors may not be comfortable with this relationship for environmental reasons, and thus may not be properly served by the selective screening approach.

So, how does one invest in a way that is consistent with their personal values and ensure that they are not associated with companies that may violate them?  Well, we think that the reality of the current situation is that it would be nearly impossible to develop a fully allocated portfolio that both screens out offenders, and includes only those companies that promote ESG values in a way that is consistent with every investor’s desires.  That said, we do think it is important to investigate and use the resources available to identify resources that provide meaningful information about the ESG activities of the investments we’re considering.  Further, we feel it is equally important to recognize that viable opportunities exist in the ESG space as asset flows move in.  Some areas within the ESG scope are actually high growth industries that provide relatively attractive prospects.

How does one invest in a way that is consistent with their personal values and ensure that they are not associated with companies that may violate them?

As a last point on this, many organizations involved in the investment data and research business have developed robust systems for the purpose of serving the selective screening approach by ranking individual companies against an array of ESG criteria.  According to the Global Initiative for Sustainability Ratings (GISR), well over 100 organizations currently produce sustainability ratings on companies.  Here at Atlas, we focus in this area on the services offered by Morningstar and Sustainalytics.  This data provides us with a starting point in our ESG analysis, but does not serve as a decision-making resource in and of itself.

Atlas commitment to integrating ESG factors

Atlas PMG believes that being an engaged and responsible investor is a cornerstone of developing sustainable performance in our investment strategies.  Atlas PMG will pursue opportunities in the ESG/SRI arena as part of the regular selection process.  To the extent that outside managers of actively managed funds have an articulated and practical strategy, PMG will obtain a copy of their ESG/SRI policy, and maintain it in the archives.  ESG/SRI principles are not part of any indexed investment opportunity, and will not recognize ESG/SRI considerations to the extent that Atlas uses these investments.