Throughout history, individuals would purchase an investment looking through the fundamental value, return on this investment and whether the products will generate this investment a positive net income for years to come. In the past decade or so, there has been a shift away from strictly looking at the fundamentals of the investment, but how well this company treats the environment and whether there is a long-term sustainability objective. The movie the Lorax is the best wide known allegory (and relatively extreme example) that comes to my mind when looking at how once a beautiful area with lush trees, wildlife and weather is turned into a factory filled, polluted, profit optimizing dystopia. Today I see many real-world company examples that are turning into this, and while they pack handsome dividends, they also aren’t cognizant of our planet which in turn leads to a wasted planet for our children and grandchildren to live on. In this post, I am going to discuss the importance of ESG (Environmental Social and Governance) policies for corporations, voting with our dollars and trying to achieve/balance profit optimization sustainably.
It is preferred by consumers and investors (especially younger investors) that the company they invest in implements a sustainability objective that shows concern for the environment and concrete action being taken to improve our planet while serving the respective market niche profitably. Many large well-known companies such as BP, Apple, McDonald’s, and WM issue ESG policies because they interact consistently with our environment, are some of the largest companies on earth and we want the transparency that they are doing good for the planet. Many individuals are skeptical to invest ESG because there is a misconception that if they invest this way, they may be at risk of losing money. Implementing sustainability will generate a dependable customer following. This following will grow substantially through the advent of social media and in turn, the customers will keep purchasing the products sleeping well at night by knowing where they shop and invest helps our planet. Lastly, having an ESG program will create satisfied employees who can stand behind the products/services with confidence which can help make the organization more impactful ensuring that the strong performance goals are met.
As individuals, we need to question why invest and allocate our dollars for a company that doesn’t treat our one earth with respect? These ESG statements allow individuals and investors to hold the company accountable when they don’t meet the objectives. Voting with our dollars demands change, companies are always inclined to make a profit and if individuals aren’t purchasing the products/services because they lack the correct initiatives in place. The companies will end up changing but remember nothing will change without concrete action on the investors/customer’s behalf. Companies must create this program, but it must be for the right reasons and not to just check a box. If they are doing it just because competitors are following this path, the program won’t be as successful and there won’t be as much strength and follow through on the execution of the program.
This can be argued, but ESG policies at first can be an initial cost center and bottom line headache in the beginning stages. Money needs to be invested in the program, with no concrete return in the beginning. Numerous things need to occur at the inception of an ESG program and this increases the research and development budget, the potential switching cost to new suppliers and determining how to handle the waste of the current and future products effectively. This is a hassle at first, but the companies that demonstrate environmentally-friendly policies will attract capital from individuals who hold the same values. Additionally, larger institutions don’t necessarily want to be associated with companies that contribute negatively to the environment. The association with these companies leads to bad publicity and often negative shareholder value.
In the future, we are headed to a time where capital will be directed toward the fundamental value of a company, along with where the company stands in terms of a positive impact on the earth. It should be a relatively equal split. Every company can profit, but not every company can profit sustainably. The latter option will have the opportunity to make the world a better place while also making the investors returns. There has been no strong research yet that supports investing sustainability leads to more returns or fewer returns. Where the company allocates its cash will help determine which group of investors invest, the long term survival of the business and the potential encouraging impact the business has for the future of the planet.
Nothing stated in this article is a recommendation from Forehand Financial to buy or sell a particular security or asset class. You should wisely consider your tolerance for risk, time horizon, and financial goals before making an investment. With investing, you run the risk of losing money, always read an investment prospectus and make an informed decision before allocating capital to a particular investment.