ESG is not a separate process – it is inherent in what good investing is all about. The best companies need to look after the environment, the communities they serve and their shareholders.
I've had two distinct careers in my professional life. Starting out as a civil engineer, working on large-scale commercial projects across the country, I realised pretty quickly that this couldn't hold my interest. With some boredom setting in I went back to school and got a Master's degree in Environmental Engineering. Contaminated groundwater flow was a problem I had encountered several times before; now it was my specialty and I spent the next ten years remediating Superfund sites across America. I was responsible for designing the process and overseeing the clean-up of several environmental disasters. The E in ESG is something I have deep experience in.
As a kid growing up in a textile mill town, I remember the excitement around the arrival of a major chain retailer known for low prices. Several years later the excitement was gone and so was main street. I witnessed at close range my hometown nearly wiped off the map by corporations that acted in a less than socially conscious way. ESG is something we get. If you are polluting a river, destroying small towns, and treating employees or shareholders poorly we will know it, and it will carry significant importance in how we choose our investments and how we engage with management.
Much of what we see today on the topic of ESG looks like "check the box activism", being reduced to a set of numbers or rankings that can make a tobacco company or an oil company look good on ESG measures. That is what is known as greenwashing, and we believe its use to be disingenuous. How a company performs on ESG has to do with how it interacts with and respects its stakeholders. If you addict your customers and harm their health you are not a good business on ESG metrics, in our view. Moreover, ESG factors involve the same degree of judgement as most other investment decisions. Rankings overlook a lot. For instance, a dual share class is fine, in the hands of a governance structure that treats its stakeholders the right way. Some companies that don't have dual share classes, in our experience, treat outside shareholders poorly, yet they might score higher simply because of their corporate structure. We repeat, ESG has everything to do with how a company interacts with and respects its stakeholders.
ESG is not a separate process – it is inherent in what good investing is all about. The best companies can't win without the environment, the communities they serve, and their shareholders having to lose. Those are the investments we look for. We implement ESG principles in an independent minded, forward looking, and fully integrated way. These are foundational issues for any comprehensive business analysis. To believe otherwise leaves us wondering about how comprehensive the rest of the analysis is. Our decades of experience shows us that our approach is, and has been, the right way to approach these issues, and the world will move towards us as time unfolds.
Our Global Focus approach to ESG
- Like all active investment criteria, ESG considerations require judgments about the future.
- Our judgments about ESG help us get the correct answers to the three questions which underpin our investment process:
- Is the business worth owning…ever?
- At what price?
- Is the management team working for shareholders?
- As with everything we do, our approach to ESG is independent and forward-looking.
- ESG is fully integrated into the investment process and is inherent in what we do.
How ESG ratings providers get it wrong
- Providers use one-size-fits-all analysis to produce quantification of ESG-friendliness.
- Ratings capture what has happened in the past, not how sustainable a business is in the future.
- Evaluating ESG factors should not be a standalone exercise.
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Where individuals or the business have expressed opinions, they are based on current market conditions, they may differ from those of other investment professionals and are subject to change without notice.
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Issued by Invesco Asset Management Limited, Perpetual Park, Perpetual Park Drive, Henley-on-Thames, Oxfordshire RG9 1HH, UK. Authorised and regulated by the Financial Conduct Authority.