Embracing Sustainable Investing
WHAT IS ESG?
ESG investing strategies, also known as Responsible Investing or Socially Responsible Investing, emphasize environmental, social, and governance issues. Most strategies focus on one specific issue (e.g., alternative energy) while some incorporate multiple factors.
Both professional and amateur investors have incorporated ethical, religious, or other considerations into their investment decisions for decades. As early as 1971, the Pax Fund was launched by Methodists who opposed the Vietnam War. The creation of ESG-focused ETFs and mutual funds, coupled with increasing awareness of major societal issues such as climate change, inequality, and inequity, has pushed ESG strategies into the mainstream. According to the Responsible Investment Association, at the end of 2019, over $3.2 trillion was invested in sustainable investments in Canada. Over half of global investors polled by Blackrock said ESG considerations were fundamental to the investment process.
DOES ESG ‘WORK’?
We have not found any satisfactory evidence to conclude that investing in a multi-dimensional ESG process is additive to returns over the long run. ESG strategies have logged strong performance over the last few years; however, this outperformance is likely attributable to the strong correlation of typically high-ranked ESG sectors (e.g., technology, consumer products) with factors that have performed well since the 2008 Financial Crisis (e.g., momentum, quality, and growth). At the same time, low-ranked ESG sectors such as Oil & Gas and Materials have underperformed over the last several years due to weak commodity prices. However, for most investors, it’s not about returns—it’s about doing the right thing and risk minimization.
OUR RATIONALE FOR SUSTAINABLE INVESTING
We have always been mindful of ESG issues, typically eschewing companies that sell firearms, tobacco, or are involved in environmentally damaging activities. We have sought out companies with strong leadership teams that cultivate diverse workforces, have high employee stock ownership, and boards that are comprised of independent members who are not afraid to hold management accountable.
In 2020, we created a more robust ESG framework that codified many of our long-held beliefs. We developed our sustainability methodology for the following reasons:
A Risk Management Tool
While returns may not be elevated, we believe returns per unit of risk can be enhanced by incorporating sustainability factors. With ESG considerations becoming more pervasive, governments around the world are enacting stricter environmental regulations and significantly increasing penalties for environment accidents. Furthermore, as money flows to ESG strategies, dirty industries face higher funding costs, operating expenses, and may require wholesale changes to their business models.
As highlighted by several high-profile cases in the last few years, companies with toxic workplaces are susceptible to significant lawsuits, investigations, and financial penalties. Neither customer boycotts nor employee resignations are positives for corporate growth or share price performance.
Supportive of Factors That Work
As value investors looking for undervalued, high-quality businesses, our proprietary screening process is designed to uncover stocks with strong competitive advantages, financial strength, and high profitability—factors that have proven to be rewarding over time. Companies with independent boards, high insider ownership, and shareholder-friendly capital allocation policies also tend to have the aforementioned factors.
Uncovering Companies with the Right Culture
A company’s most important asset is its people. A culture that promotes teamwork, innovation, diversity of thought, inclusion, and risk-taking is a wellspring for competitive advantage creation.
Changing Consumer Preferences
Consumers are increasingly factoring ESG considerations into their buying decisions. A study by IBM revealed that 60% of customers would change their shopping habits to reduce environmental impact. There’s also evidence that the pandemic has fundamentally changed consumer behaviour. Recent McKinsey and Accenture polls revealed greater sensitivity to environmental waste, product origin, and quality. Consumers are not just looking for a product—they want to purchase from companies that reflect their own values.
DESIGNING A UNIQUE APPROACH
From the outset we decided to design our own methodology rather than outsource one from a third-party vendor. With our own ESG methodology, we have complete control, full transparency, and the ability to continuously improve our strategy in ways that make sense to us. Our process assigns a higher ranking to companies that are good corporate citizens, have diverse and independent boards, and are committed to reducing their carbon footprint.
The first step in our approach is to set aside certain industries such as Defense, Oil & Gas, and Chemicals—those associated with controversial or harmful activities. The remaining companies are ranked on the following five dimensions:
GENERATION PMCA ESG RANKING METHODOLOGY
1. GOVERNANCE
Based on board diversity, board tenure, and number of independent directors.
2. ENVIRONMENTAL & SOCIAL IMPACT
Analysis of environmental and social impact achievements, including weightings in leading ESG ETFs, UN Sustainability rankings, and environmental and social impact awards.
3. CULTURE SCORE
Analysis of remuneration policies, management salaries, and employment opportunities.
4. VIRTUOUS CYCLE SCORE
Ensuring high profitability and return on invested capital can fuel social and environmental investments.
5. SHAREHOLDER ALIGNMENT SCORE
Emphasis on management teams that are aligned with shareholders, have meaningful share ownership, and exhibit prudent capital allocation.
Quarterly ESG rankings for global large caps are presented on our website.
Unique to our process are embedded profitability metrics. We prize highly profitable companies that can generate excess cash flow which can be reinvested in large-scale community projects, sweeping changes to carbon footprints, and actions ensuring hiring practices support diversity, inclusion, and equality. This Virtuous Cycle Score is designed to capture free cash flow being invested in socially-responsible initiatives, which in turn improves corporate culture and competitive advantages, leading to even greater free-cash-flow generation.
We evaluate a company’s ESG ranking before its inclusion in portfolios. However, our quantitative methodology is just the first step. We may include companies in industries initially set aside should they demonstrate substantial commitments to reducing their carbon footprints, reducing controversial or environmentally harmful activities, or other clearly articulated material changes to products and/or services. Our approach rewards companies that are making wholesale changes because these initiatives often result in the largest ESG benefits.
Perfect companies do not exist. Large technology companies with large-scale carbon reduction programs may simultaneously be vying for unsavoury military contracts. Consumer products companies with diverse and independent boards likely still utilize too many chemicals, plastics, and overuse fresh water. Most companies rely on China for growth—which ultimately means doing business with an authoritarian regime that has countless disagreeable policies. But a well-designed framework can assist us in homing in on the better actors.
For investors that want to place an even heavier emphasis on ESG considerations, we launched a dedicated pure-ESG strategy. The Global Value ESG Model more strictly utilizes our proprietary ESG methodology to rank global large-cap equities based on a combined ESG and value score with portfolios still comprised of securities selected based on our fundamental and/or quantitative research.
DISCLAIMER
The information contained herein is for informational and reference purposes only and shall not be construed to constitute any form of investment advice. Nothing contained herein shall constitute an offer, solicitation, recommendation or endorsement to buy or sell any security or other financial instrument. Investment accounts and funds managed by Generation PMCA Corp. may or may not continue to hold any of the securities mentioned. Generation PMCA Corp., its affiliates and/or their respective officers, directors, employees or shareholders may from time to time acquire, hold or sell securities mentioned.
The information contained herein may change at any time and we have no obligation to update the information contained herein and may make investment decisions that are inconsistent with the views expressed in this presentation. It should not be assumed that any of the securities transactions or holdings mentioned were or will prove to be profitable, or that the investment decisions we make in the future will be profitable or will equal the investment performance of the securities mentioned. Past performance is no guarantee of future results and future returns are not guaranteed.
The information contained herein does not take into consideration the investment objectives, financial situation or specific needs of any particular person. Generation PMCA Corp. has not taken any steps to ensure that any securities or investment strategies mentioned are suitable for any particular investor. The information contained herein must not be used, or relied upon, for the purposes of any investment decisions, in substitution for the exercise of independent judgment. The information contained herein has been drawn from sources which we believe to be reliable; however, its accuracy or completeness is not guaranteed. We make no representation or warranties as to the accuracy, completeness or timeliness of the information, text, graphics or other items contained herein. We expressly disclaim all liability for errors or omissions in, or the misuse or misinterpretation of, any information contained herein.
All products and services provided by Generation PMCA Corp. are subject to the respective agreements and applicable terms governing their use. The investment products and services referred to herein are only available to investors in certain jurisdictions where they may be legally offered and to certain investors who are qualified according to the laws of the applicable jurisdiction. Nothing herein shall constitute an offer or solicitation to anyone in any jurisdiction where such an offer or solicitation is not authorized or to any person to whom it is unlawful to make such a solicitation.
WHAT IS ESG?
ESG investing strategies, also known as Responsible Investing or Socially Responsible Investing, emphasize environmental, social, and governance issues. Most strategies focus on one specific issue (e.g., alternative energy) while some incorporate multiple factors.
Both professional and amateur investors have incorporated ethical, religious, or other considerations into their investment decisions for decades. As early as 1971, the Pax Fund was launched by Methodists who opposed the Vietnam War. The creation of ESG-focused ETFs and mutual funds, coupled with increasing awareness of major societal issues such as climate change, inequality, and inequity, has pushed ESG strategies into the mainstream. According to the Responsible Investment Association, at the end of 2019, over $3.2 trillion was invested in sustainable investments in Canada. Over half of global investors polled by Blackrock said ESG considerations were fundamental to the investment process.
DOES ESG ‘WORK’?
We have not found any satisfactory evidence to conclude that investing in a multi-dimensional ESG process is additive to returns over the long run. ESG strategies have logged strong performance over the last few years; however, this outperformance is likely attributable to the strong correlation of typically high-ranked ESG sectors (e.g., technology, consumer products) with factors that have performed well since the 2008 Financial Crisis (e.g., momentum, quality, and growth). At the same time, low-ranked ESG sectors such as Oil & Gas and Materials have underperformed over the last several years due to weak commodity prices. However, for most investors, it’s not about returns—it’s about doing the right thing and risk minimization.
OUR RATIONALE FOR SUSTAINABLE INVESTING
We have always been mindful of ESG issues, typically eschewing companies that sell firearms, tobacco, or are involved in environmentally damaging activities. We have sought out companies with strong leadership teams that cultivate diverse workforces, have high employee stock ownership, and boards that are comprised of independent members who are not afraid to hold management accountable.
In 2020, we created a more robust ESG framework that codified many of our long-held beliefs. We developed our sustainability methodology for the following reasons:
A Risk Management Tool
While returns may not be elevated, we believe returns per unit of risk can be enhanced by incorporating sustainability factors. With ESG considerations becoming more pervasive, governments around the world are enacting stricter environmental regulations and significantly increasing penalties for environment accidents. Furthermore, as money flows to ESG strategies, dirty industries face higher funding costs, operating expenses, and may require wholesale changes to their business models.
As highlighted by several high-profile cases in the last few years, companies with toxic workplaces are susceptible to significant lawsuits, investigations, and financial penalties. Neither customer boycotts nor employee resignations are positives for corporate growth or share price performance.
Supportive of Factors That Work
As value investors looking for undervalued, high-quality businesses, our proprietary screening process is designed to uncover stocks with strong competitive advantages, financial strength, and high profitability—factors that have proven to be rewarding over time. Companies with independent boards, high insider ownership, and shareholder-friendly capital allocation policies also tend to have the aforementioned factors.
Uncovering Companies with the Right Culture
A company’s most important asset is its people. A culture that promotes teamwork, innovation, diversity of thought, inclusion, and risk-taking is a wellspring for competitive advantage creation.
Changing Consumer Preferences
Consumers are increasingly factoring ESG considerations into their buying decisions. A study by IBM revealed that 60% of customers would change their shopping habits to reduce environmental impact. There’s also evidence that the pandemic has fundamentally changed consumer behaviour. Recent McKinsey and Accenture polls revealed greater sensitivity to environmental waste, product origin, and quality. Consumers are not just looking for a product—they want to purchase from companies that reflect their own values.
DESIGNING A UNIQUE APPROACH
From the outset we decided to design our own methodology rather than outsource one from a third-party vendor. With our own ESG methodology, we have complete control, full transparency, and the ability to continuously improve our strategy in ways that make sense to us. Our process assigns a higher ranking to companies that are good corporate citizens, have diverse and independent boards, and are committed to reducing their carbon footprint.
The first step in our approach is to set aside certain industries such as Defense, Oil & Gas, and Chemicals—those associated with controversial or harmful activities. The remaining companies are ranked on the following five dimensions:
GENERATION PMCA ESG RANKING METHODOLOGY
1. GOVERNANCE
Based on board diversity, board tenure, and number of independent directors.
2. ENVIRONMENTAL & SOCIAL IMPACT
Analysis of environmental and social impact achievements, including weightings in leading ESG ETFs, UN Sustainability rankings, and environmental and social impact awards.
3. CULTURE SCORE
Analysis of remuneration policies, management salaries, and employment opportunities.
4. VIRTUOUS CYCLE SCORE
Ensuring high profitability and return on invested capital can fuel social and environmental investments.
5. SHAREHOLDER ALIGNMENT SCORE
Emphasis on management teams that are aligned with shareholders, have meaningful share ownership, and exhibit prudent capital allocation.
Quarterly ESG rankings for global large caps are presented on our website.
Unique to our process are embedded profitability metrics. We prize highly profitable companies that can generate excess cash flow which can be reinvested in large-scale community projects, sweeping changes to carbon footprints, and actions ensuring hiring practices support diversity, inclusion, and equality. This Virtuous Cycle Score is designed to capture free cash flow being invested in socially-responsible initiatives, which in turn improves corporate culture and competitive advantages, leading to even greater free-cash-flow generation.
We evaluate a company’s ESG ranking before its inclusion in portfolios. However, our quantitative methodology is just the first step. We may include companies in industries initially set aside should they demonstrate substantial commitments to reducing their carbon footprints, reducing controversial or environmentally harmful activities, or other clearly articulated material changes to products and/or services. Our approach rewards companies that are making wholesale changes because these initiatives often result in the largest ESG benefits.
Perfect companies do not exist. Large technology companies with large-scale carbon reduction programs may simultaneously be vying for unsavoury military contracts. Consumer products companies with diverse and independent boards likely still utilize too many chemicals, plastics, and overuse fresh water. Most companies rely on China for growth—which ultimately means doing business with an authoritarian regime that has countless disagreeable policies. But a well-designed framework can assist us in homing in on the better actors.
For investors that want to place an even heavier emphasis on ESG considerations, we launched a dedicated pure-ESG strategy. The Global Value ESG Model more strictly utilizes our proprietary ESG methodology to rank global large-cap equities based on a combined ESG and value score with portfolios still comprised of securities selected based on our fundamental and/or quantitative research.
DISCLAIMER
The information contained herein is for informational and reference purposes only and shall not be construed to constitute any form of investment advice. Nothing contained herein shall constitute an offer, solicitation, recommendation or endorsement to buy or sell any security or other financial instrument. Investment accounts and funds managed by Generation PMCA Corp. may or may not continue to hold any of the securities mentioned. Generation PMCA Corp., its affiliates and/or their respective officers, directors, employees or shareholders may from time to time acquire, hold or sell securities mentioned.
The information contained herein may change at any time and we have no obligation to update the information contained herein and may make investment decisions that are inconsistent with the views expressed in this presentation. It should not be assumed that any of the securities transactions or holdings mentioned were or will prove to be profitable, or that the investment decisions we make in the future will be profitable or will equal the investment performance of the securities mentioned. Past performance is no guarantee of future results and future returns are not guaranteed.
The information contained herein does not take into consideration the investment objectives, financial situation or specific needs of any particular person. Generation PMCA Corp. has not taken any steps to ensure that any securities or investment strategies mentioned are suitable for any particular investor. The information contained herein must not be used, or relied upon, for the purposes of any investment decisions, in substitution for the exercise of independent judgment. The information contained herein has been drawn from sources which we believe to be reliable; however, its accuracy or completeness is not guaranteed. We make no representation or warranties as to the accuracy, completeness or timeliness of the information, text, graphics or other items contained herein. We expressly disclaim all liability for errors or omissions in, or the misuse or misinterpretation of, any information contained herein.
All products and services provided by Generation PMCA Corp. are subject to the respective agreements and applicable terms governing their use. The investment products and services referred to herein are only available to investors in certain jurisdictions where they may be legally offered and to certain investors who are qualified according to the laws of the applicable jurisdiction. Nothing herein shall constitute an offer or solicitation to anyone in any jurisdiction where such an offer or solicitation is not authorized or to any person to whom it is unlawful to make such a solicitation.