The source of my pain? An interview I read a while ago with a particularly impassioned ESG advocate (although I don’t think he was a fund manager). The topic of conversation was a controversial company that has experienced a substantial share price drop as a result of material sustainability issues. My bugbear was with the response of the ESG advocate though. I’ll paraphrase for convenience but when asked whether the stock might now represent a great buying opportunity the advocate replied:

“The whole point of ESG investing is to take pain. We should be willing to underperform if this means avoiding companies that do harm”

Ouch… that hurts. There’s the pain.

Who knew sustainable investing was a masochistic pursuit (not me)!

For me this is the clever work of a cynical journalist cherry picking sentiment, and it totally misses the point. For me, sustainability analysis involves assessing the sustainability of products and practices and the rate at which these factors improve (or regress). For me, it’s a meaningful alpha generating tool.

So back to “taking the pain”…do we think that’s a factor of sustainable investing. No. I see it this way. The point is to:

  1. a) Avoid the pain
  2. b) Identify disruptive sustainable growth opportunities before the market does

You may have to suffer through the short-term underperformance and watch companies and subsectors that we deem to be unsustainable outperform. BUT that’s very different from deliberately underperforming as the above quote implies.

If our analysis is correct (and before we get ahead of ourselves – no analysis is always correct), outperformance of an unsustainable company will be brief and its unsustainable products and/or business practices will be found out in the end, unless it takes steps to address these shortcomings. By definition, something which is unsustainable, will not sustain. And if it is not going to sustain, it is never going to be a good investment. So there you have it – in an unsustainable company you may get a short term speculative trade (perhaps), but never a good investment, in my opinion.

If nothing else, the original quote does teach us one thing – that as a group, sustainable investors need to do better at communicating the multiple advantages of sustainability. Yes we are intentionally trying to have positive impact with our clients’ capital, but it is not simply an ideological venture with a performance cost attached. So what would my response have been to such a question? Hopefully something like this:

 “Is the product that the company sells getting more sustainable? Is the company demonstrably improving its practices to address its material sustainability risks? If not, I will never think it is cheap enough to be a great investment opportunity.”

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