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Sustainable Investing is the full integration of environmental, social and governance (ESG) factors into investment analysis and decision making. Investment managers can combine rigorous financial analysis with equally rigorous ESG analysis in a defined, systematic and repeatable portfolio management process.

Now, an abundance of evidence indicates that the broader investment management community is embracing Sustainable Investing principles. Why does this matter? As investors increasingly see specific sustainability issues as being important, more information will be available about these issues; and more analysts will cover them. We believe that companies with superior sustainability performance are also better long-term investments.

Sustainable investment managers seek to identify better-managed companies that:
• Are leaders in their industries
• Are more forward-thinking
• Are better at managing risk
• Meet positive standards of corporate responsibility
• Focus on the long term

What is ESG Criteria?

ENVIRONMENTAL criteria includes such issues as air and water emissions, recycling and waste reduction, use of clean and renewable energy, climate change initiatives, and other policies and practices focused on attaining and promoting environmental sustainability.

SOCIAL criteria examines companies from three different perspectives – workplace and supply chain issues, product integrity and community involvement.

GOVERNANCE criteria include such issues as executive compensation, board structures, actions and charters and the protection they afford to the interests of both shareholders and stakeholders.

The inclusion of ESG criteria in the investment process can result in an increased level of scrutiny that helps to identify better-managed companies, and construct portfolios with better long-term investment prospects.

Mainstream News Helps Focus on Sustainable Investing Process
“As climate change has become a mainstream investment issue, we started seeing more and more mainstream news reports that talked about greenhouse gas emissions and which companies would thrive and which would be hurt by a carbon trading regime or mandatory emissions limitation” says Julie Gorte, Ph.D., Pax World senior vice president for Sustainable Investing. “Simply put, we think increased attention to sustainability in investment processes helps drive change,” says Gorte. “Ultimately the adoption of these sustainability practices offers the potential for improved long-term investment performance.”

• The world’s largest stock exchange, NYSE Euronext, has announced that it will begin to make ESG information available on 2,800 of the world’s largest companies.1
• Bloomberg recently announced that it would soon begin to distribute publicly available ESG data on 2,000 to 3,000 companies through its 250,000 data terminals worldwide.2
• Fidelity Investments has added ESG performance ratings to its stock research offering.3
• The CFA Institute Centre for Financial Market Integrity, the global policy authority on professional and performance standards, financial reporting, and capital markets, launched its 2008 Environmental, Social, and Governance Factors at Listed Companies: A Manual for Investors, last year to assist investors in understanding how a company deals with ESG issues. Kurt Schacht, CFA, managing director of the CFA Institute Centre stated, “Once considered ‘fringe issues,’ these topics [ESG] are now part and parcel of the metrics used by investment professionals to analyze and value the public companies they invest in.”4
• More than 500 asset owners, investment managers and professional service providers from around the world have become signatories to the Principles for Responsible Investment, a global investor initiative designed to provide a framework for better integration of ESG issues into mainstream investment practices.5
• A recent report from Mercer, a leading global provider of investment consulting services, found that 39% of the investment managers who have signed onto the Principles for Responsible Investment initiative have already incorporated ESG issues into their decision-making process for developed market equities. The Mercer study, which was published in July 2009, examined the adoption of ESG factors in the investment decision-making process within the broader financial markets. In the report, Mercer states that the incorporation of ESG criteria into investment analysis is becoming more common. In addition, it recognized that those investment managers that currently incorporate ESG analysis into their processes have certain advantages over those who don’t.”6

The Impact of ESG Criteria on Financial Performance
By evaluating companies on the basis of strict ESG criteria, we derive added insight that we believe can influence the performance of their stocks:

• Reporting and disclosure
• Avoid or minimize environmental liabilities
• Lower costs/increase profitability through energy and other efficiencies
• Indicator of well-governed company
• Attentive to regulatory and reputational risk
• Improved productivity and morale
• Openness to new ideas and innovation
• Reduce potential for litigation
• Reduce turnover and absenteeism
• Create brand loyalty
• Align interests of shareowners and management
• Avoid unpleasant financial surprises

According to the Mercer study, “In many cases, ESG performance can directly impact a corporation’s ability to expand to new markets, attract knowledgeable and skilled workers, and access key resources— important factors in considering a corporation’s prospects for future financial performance.”6

  1. New York Stock Exchange – “New Solutions to Help NYSE-Listed Companies Enhance Corporate Governance and Transparency,” May 19, 2009.
  2. Business Week – Mindy Libber, “Companies Come Clean on Climate Change,” June 3, 2009.
  4. CFA Institute Centre for Financial Market Integrity, “New ESG Manual from CFA Institute Centre Helps Investors Evaluate Environmental, Social and Governance Factors,” June 25, 2008.
  5. Principles for Responsible Investment,, May 31, 2009.
  6. Mercer, “Why Consider ESG Factors? The Case for ESG Integration,” July 14, 2009.

Beth Jones, RLP® is a Registered Life Planner and Financial Consultant with Third Eye Associates, Ltd, a Registered Investment Adviser located at 38 Spring Lake Road in Red Hook, NY. She can be reached at 845-752-2216 or Securities offered through Commonwealth Financial Network, Member FINRA/SIPC.

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