The Challenge of Creating Genuine Value amid Populist Trends
There is the letter of the law, and there is the spirit of the law.
The same can be said of Environmental, Social and Governance (ESG) compliance standards for publicly traded companies.
There is the letter of the standards, and there is the spirit of the standards. And there are significant variances in how businesses commit to genuinely enhancing our quality of life and the well-being of the planet instead of paying lip service to these objectives.
The phrase 'greenwashing' refers to attempts to exploit the growing demand for environmentally sound products and investments – capitalizing on the fact that it is very difficult to separate the wheat from the chaff. It is possible that some enterprises will manipulate ESG guidance to achieve lucrative results, which may hurt the community, the environment or the investors in question.
These actions may range from well-intentioned but largely non-impactful steps taken by companies to appeal to shifts in public sentiment to truly egregious acts. Further, there is a stark difference between taking actions that only grow profits for shareholders and taking actions that distribute profits between stakeholders and shareholders to invest responsibly in the future.
Greenwashing does a great disservice to investors who are honestly seeking to encourage a better world through their investment choices. Rather than investigating each company's underlying circumstances or holding in a particular fund, many investors will buy based on the fund's "ESG" label.
Unbeknownst to most, "ESG" funds cost approximately 33% more to manage yet share striking similarities to market funds. Consider the following:
Which fund represents the "ESG" funds?
CANADA A CANADA B
Royal Bank Royal Bank
TD Bank TD Bank
Canadian National Railway Canadian National Railway
Bank of Nova Scotia Bank of Nova Scotia
Brookfield Asset Management Brookfield Asset Management
Bank of Montreal Bank of Montreal
Canadian Pacific Railway Canadian Pacific Railway
Canadian Imperial Bank of Commerce Barrick Gold Corp.
UNITED STATES A UNITED STATES B
Johnson & Johnson Johnson & Johnson
Proctor & Gamble Proctor & Gamble
Home Depot Berkshire Hathaway
SANDSTONE Asset Management meets the highest standards set out by ESG and maintains a B-Corp status, which speaks to the company's principles. We are proud of this, but we also know that it is only half of the story. Truly successful companies strive for a balance between the pursuit of profit and meaningful social purpose.
Furthermore, studies have shown that responsible companies perform better than their peers, including during times of global unrest. Companies should be held accountable for transparency, ethical practices, and processes that prioritize value on both an individual and a collective level. Creating value for society makes good business sense.
At Sandstone, we like to make sense!
And by-the-way, Fund A in both examples are ESG Funds.