Is environmental, social, and governance (ESG) investing having a moment in the sun? Asset managers have found that ESG funds outperformed their peers in the first four months of 2020, and many investors are now noticing how ESG considerations can be especially relevant during a crisis.
For Katherine Collins, CFA, the head of sustainable investing at Putnam Investments, ESG metrics have been a fundamental part of every investment decision. As part of the 73rd CFA Institute Annual Virtual Conference, she explained that ESG analysis offers advantages by assessing different types of risk. “It’s increasingly common for different types of investors to focus on a materiality-based framework,” she said.
The focus on materiality allows analysts to gain a better understanding of a company’s long-term operational business risks. “We’re starting to develop a shared understanding of what’s important for a software company versus what’s important for a mining company,” Collins said. “Those should be very different conversations, very different metrics.”
Many of those metrics have taken on a new importance as companies prepare for the months ahead. Collins pointed out that one example can be seen in the way that companies approached layoffs — some firms announced mass layoffs through impersonal conference calls, and other companies actively helped former staff find future opportunities.
“What’s interesting to me as an analyst is: in theory, those two actions are exactly the same,” Collins said. On a spreadsheet, financial models would show similar changes in operating expenses. “But those two scenarios I just described are night and day in terms of their real impact.”
Collins added, “I don’t have to go too many more columns over on my spreadsheet before ‘how’ becomes just as important as ‘what’ when these critical decisions have to be made.”
“We’d never wish for this way to gain that insight, under crisis, but it is a time when it matters if the CEO shows up on the conference call,” Collins said. “It matters what they’re saying, to not only their shareholders but their employees, their clients, everyone else who surrounds the company who is also part of that communication stream.”
These decisions can also reveal how thoroughly companies have integrated ESG considerations into their normal operations. Collins asked, “Is sustainability like a luxury good that you spend on when you think you can afford it? Or is it really the source of value creation, which would make it the last thing that you ever would cut?”
This kind of prioritization can show investors whether a company addresses material ESG issues as a fundamental part of business or whether it is merely engaging in corporate philanthropy. Collins explained that philanthropy is nice, but it’s not the point. “When it’s relevant and appropriate, I like to do it as an investor, but that’s not at all the same thing as having sustainability deeply interwoven into the strategy of the company,” she said.
The months ahead will test every organization’s strategy, but Collins sees it as an opportunity. “It’s always a little creepy to look for opportunity in the midst of turmoil,” she said. “And yet, to get past this phase of crisis, we really do need some new solutions to emerge and take root.”
This year, archived recordings of every presentation from the CFA Institute Annual Virtual Conference will be available online, with additional insights and commentary published on the CFA Institute Annual Virtual Conference blog.
All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.