Sustainable Investing: Why ESG Makes Sense in the Short Run Too
By Tom Polton, Skytop Contributor / November 15th, 2022
In 2019 Tom formed NV Sustainability LLC, a consulting organization to advise companies, financial institutions, business coalitions, and non-profit organizations to better manage environmental risks, seize opportunities, create leading sustainability programs to address emerging environmental issues and societal expectations.
Previously, Tom has more than 30 years of experience leading environmental, health and safety (EHS) programs for Pfizer. In 2010 he was appointed to lead Pfizer’s Environmental Sustainability program. Together with his responsibilities for Product Stewardship, Tom led efforts to reduce Pfizer’s environmental impacts throughout the product life cycle – from research, to procurement, to manufacturing, to product disposal. In a prior role, Tom directed Pfizer’s global health and safety programs associated with process safety, fleet safety, fire life safety, occupational medicine and occupational hygiene. Tom joined Pfizer after finishing his master’s degree from the Department of Environmental Health Sciences at the Harvard School of Public Health.
Tom has a Bachelor’s degree in Biochemistry from Brandeis University. He has served on the Harvard School of Public Health Leadership Council since 2006. Tom also served as President of the Board of Directors of the Pharmaceutical Product Stewardship Working Group, a 200-member coalition to address the responsible collection and disposal of unwanted medicine.
Near Term Too
If you are like many investors who only recently had the epiphany that Environmental, Social and Governance (ESG) criteria provide essential insights for long-term financial success, I might argue that you are still five years behind in your thinking. ESG factors underlie company performance in the near term too.
Climate Related Disasters Cost Billions Today
One can start by examining the billion-dollar disasters in the US compiled by the National Oceanic and Atmospheric Agency. The categories of disasters sound like a series of events from the Bible – floods, fires, droughts, heat waves, tornados, and hailstorms – but these devastating events happen annually in our nation with an estimated price tag of $2.295 T since 1980.
In 2021 alone twenty-one events had estimated costs $152 B and resulted in 724 deaths. As of mid-October 2022, there have been fifteen weather/climate related disaster events in the U.S., each with losses exceeding $1B. These billion-dollar events are not restricted to one region of the country but occur throughout our borders. Just this year the western U.S. experienced deadly droughts and heat waves, the north central had damaging severe weather and hailstorms, the southeastern states were hit by tornados, Missouri and Kentucky were flooded, Florida suffered Hurricanes Ian and Fiona, and Texas was hammered by two severe weather events in the spring. Similar reports of deadly weather events occurred across the globe.
While climate experts expect these events to become more frequent, more deadly and more costly in the future due to global climate change, our experience today provides more than enough evidence that climate related risks warrant consideration by businesses and investors for their near-term impact. Resiliency and physical risk assessments are essential to avoiding supply chain and business disruptions.
Worker Priorities Impact Performance
In addition to these environmental issues, we also see the business impact from important social considerations. Larry Fink, BlackRock’s CEO, pointed out in his 2022 letter to CEOs that “no relationship has been changed more by the pandemic than the one between employers and employees.” The quit rate in the U.S. and the UK has been at historic highs. The U.S. saw some of the highest wage growth in decades. Employees across the globe are looking for more from their employer – including greater flexibility and more meaningful work. Workers are prioritizing personal wellbeing. According to research by BlackRock, companies that deliver on these issues are reaping the rewards – “companies who forged strong bonds with their employees have seen lower levels of turnover and higher returns through the pandemic.” Larry Fink’s Annual 2022 Letter to CEOs | BlackRock
Don’t Be Dissuaded By Black Swan Events
There is no doubt that one can find time segments where sustainable investing strategies underperform conventional investing. For instance, we currently see the fossil fuel companies Exxon and Chevron performing strongly. Oil prices spiked above $110-$120 a barrel following the February 24th Russian invasion of Ukraine and continue to remain above $80 a barrel. Analysts generally surmise that oil producers can deliver handsome profits as long as oil trades above $60 a barrel. These recent events do not mean that sustainable investing is critically flawed over the long term or even with a short term view. Fatih Birol, Executive Director of the International Energy Agency was quoted in The Economist saying that when Russia switched off Western gas supplies the dash for coal “appeared to be relatively small and temporary.”
The applicable analogy might be that one could evaluate every game LeBron James has played and find a fleeting moment where a scrub player off the bench outperformed basketball’s king. Yet, it would be impossible to find sustained success by nearly any other NBA player if we examine performance over longer periods such as the entire game, a full season, and certainly as we evaluated the length of a career. The same is true for sustainable investing. If we use the right criteria and look over a reasonable period of time, we can distinguish performers correctly.
Work to Improve ESG Information
No doubt we need better metrics and data to help sustainable investing decisions. We do not have, nor can we reasonably expect to have, one ESG indicator that correlates with stock performance. Too many ESG ratings rely on lagging information, limited transparency, and lack of comparability. Still as we all work to refine the information used for sustainable investing, let’s put aside the argument that ESG is not relevant to long-term and short-term performance. We don’t need a telescope to look way into the distance to see the impacts of ESG. All we need to do is open our eyes and look around at today’s events to understand the importance of ESG.