October 15, 2019

ESG - Environmental, Social, and Governance

I spoke at our recent Evening Event with the Cabot Team about how we integrate ESG risk analysis in our process of choosing individual stocks and would like to summarize that for you here.

What is ESG?

ESG or, Environmental, Social, and Governance, incorporates into the stock selection process a look at risks that have traditionally been overlooked by investors. ESG as practiced at Cabot is NOT about moral or religious values, or “feel good” companies. It is about investment performance, specifically enhancing performance by avoiding risks.

Money has poured into ESG-mandated funds in recent years

Money has poured into ESG-mandated funds in recent years, even though “ESG” is not well defined or standardized.

Chart titled "Sustainable and Responsible Investing in the United States 1995-2018" Source: US SIF Foundation

This has impacted markets, and in turn has impacted CEO behavior. The recent statement on “The Purpose of a Corporation” by The Business Roundtable is a case in point.

Statement on the Purpose of a Corporation from Business Roundtable

Does ESG work?

Academic and industry research suggests it does enhance performance. However, there are some shortcomings: standardized practices, data availability, and cost are all difficulties faced by practitioners today. ESG is NOT an investment process by itself. It is part of a process of examining companies. That process needs to include considerations of price, growth, competition, and other traditional investment characteristics.