ESG Investing: Why “Doing the Right Thing” May Be a Good Investment Idea

John Tennaro, CIMA®, CSRIC™
February 13, 2020

There is a longstanding perception that investors have to sacrifice performance potential to invest for ESG. But that perception isn’t backed up by the data.

One of our primary objectives at CIBC Private Wealth is to monitor evolving trends in the investment markets and adapt our clients’ portfolios to try to benefit from them. Today, there may be no trend more captivating than environmental, social and governance (ESG) investing, which focuses on investing dollars in companies believed to be “doing the right thing.”

In this day and age, convictions matter, and we find investors are eager to put their money where their values are. Integrating ESG factors into a strategy has become justifiably compelling, as we believe it can result in a positive impact on risk and return. This isn’t surprising to CIBC Private Wealth. Our ESG research process is a logical extension of our firm’s long history of deep fundamental analysis.

What Is ESG? 

ESG refers to the three central factors used to measure the sustainable and ethical impact of a company or business: 

 
ENVIRONMENTAL
conservation and protection of the environment
SOCIAL
relationships with people and communities
GOVERNANCE
company leadership and shareholder rights
  • Climate Change
  • Health and Safety
  • Board Structure
  • Water Use
  • Privacy and Data
  • Business Ethics
  • Energy Consumption
  • Labor Relations
  • Legal Compliance
  • Waste Management
  • Human Rights
  • Executive Compensation
  • Regulatory Thresholds
  • Community Involvement
  • Accouting Transparency
  • Pollution
  • Corporate Culture
  • Shareholder Rights
  • Conservation Efforts
  • Employee Diversity
  • Ownership
 
  • Product Responsibility
 

 

ESG factors can have long-term implications on a company’s financial and competitive performance. By evaluating how a company engages the range of ESG challenges and opportunities, investors can gain profound insight into a company’s culture, operational strength and quality of management. 

What ESG Is, and What ESG Isn’t

 
ESG is: ESG isn't:
  • An analysis of material ESG issues--as well as financial ones--as a stage in the security selection process
  • A way to group “good” or “bad” companies
  • A way to gain greater insight into the awareness and response of a company or business
  • A guide for eliminating names from a portfolio (e.g., exclusionary screening)
  • A way to potentially mitigate risk and identify outperformers
  • A set of fixed criteria that transforms a non-ESG portfolio into an ESG portfolio
  • A way for investors to achieve competitive risk-adjusted returns
  • A one-size-fits-all approach

 

Performance and Purpose Can Go Hand in Hand

There is a longstanding perception that investors have to sacrifice performance potential to invest for ESG. But that perception isn’t backed up by the data. A wealth of studies in recent years demonstrated repeatedly that companies embracing ESG considerations typically perform as well as, or better than, those that don’t.

This makes sense to us. In our experience, quality companies with good management teams typically want to be good corporate citizens, and tend to have a firm grasp on the risks and opportunities that ESG issues create. Broadly speaking, ESG considerations align well with the goal of reducing uncertainty while providing greater transparency, an objective that benefits all investors. 

Our Approach

We believe ESG investing is an enhancement to, not a replacement for, traditional financial analysis. By investing in industry-leading companies with solid underlying fundamentals--which also have intentional ESG and sustainable practices--investors can achieve attractive long-term results.

What makes us different is our:

  • Intrinsic focus on quality
  • Commitment to, and engagement with, ESG practices

We use a well-defined process that analyzes ESG intention from both an opportunity and risk perspective to identify companies demonstrating quantifiable, positive impact. These are companies that generally have superior management teams leading fundamentally attractive businesses that identify, prioritize and focus on ESG issues, and typically demonstrate the following behaviors:

  • Support strong governance
  • Encourage comprehensive stakeholder engagement
  • Maintain a long-term perspective
  • Display a high level of transparency
  • Thrive during periods of uncertainty and complexity
  • Influence a shifting landscape versus the status quo
  • Support and encourage a positive and healthy work environment
  • Drive business by purpose as well as product

What’s Next?

As the ESG domain continues to evolve and expand, it is important to stay informed, educated and prepared. If you are interested in learning more about ESG investing or how we can help you achieve your ESG goals and integrate ESG factors into your portfolio, contact your CIBC Private Wealth advisor for more information.

 

John Tennaro, CIMA®, CSRIC, is a senior vice president and senior investment analyst in CIBC Private Wealth Management’s Washington, D.C. office, with more than 20 years of industry experience. John oversees CIBC Private Wealth’s efforts in ESG and sustainable and responsible investing.  John is also responsible for investment manager due diligence and selection within the Multi-Manager Investment Program’s traditional investments team.

Investments & Wealth Institute™ (The Institute) is the owner of the certification marks “CIMA,” and “Certified Investment Management Analyst.” Use of CIMA, and/or Certified Management Analyst signifies that the user has successfully completed the Institute’s initial and ongoing credentialing requirements for investment professionals.