Does investing drive change?

Ownership or avoidance of 'irresponsible' companies does make a difference

Jon Hale 18 June, 2019 | 2:13AM

SolarThis question, received last week from a webinar attendee, is one that I hear some version of on a regular basis. I'll get to whether avoiding an irresponsible company makes a difference, but first keep in mind that even though the terms "responsible" and "sustainable" investing are often used interchangeably today, the use of “irresponsible" here obscures the main thrust of what I prefer to call "sustainable investing."

Virtually all sustainable funds today are focused on integrating the consideration of environmental, social, and corporate governance issues in the investment process rather than just flatly avoiding so-called irresponsible companies. The role of ESG varies by fund. Some may consider ESG only in extreme cases and even then may not avoid a company with ESG-related problems if its stock is priced right. For others, ESG analysis is more central to every security-selection and portfolio-construction decision.

The idea is to populate a portfolio with companies that perform well on the financially material ESG-related issues that affect their businesses and avoid those that are not addressing these issues effectively. For a transportation company--an airline, for example--the biggest ESG concerns may be carbon emissions, safety, and human capital. For a social-media company, material ESG issues include data privacy and security, content governance, and anticompetitive practices.

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About Author

Jon Hale

Jon Hale  Jon Hale, Ph.D., CFA, is the head of sustainability research for Morningstar.