What is sustainable? In this case I’m not referring to dividends, which clearly weren’t sustainable given the flood of ‘deferrals’ and cancellations delivered in recent months. This week I’m referring to sustainability, as in ‘is a company operating sustainably and not pillaging solely for profit?’.
Whilst not entirely the same, investing and operating sustainably as a business is closely related to the fast growing ESG or Environmental, Social and Governance factors that are now being included in every ASX announcement, fund manager report and newspaper article.
And no wonder, according to Stockspot, investment into sustainable ETFs has increased 79% per annum over the last five years in Australia alone and it now stands in many trillions overseas. There is little doubt the trend will continue following the strong performance of ESG-focused Australian Ethical Investments (AEF:ASX) in 2019-19, during which its Emerging Companies Fund outperformed the benchmark, S&P/ASX Small Industrials by 13.5% using a range of negative screens.
The unfortunate issue is that ESG investing isn’t simple. As a financial adviser I’ve had discussions with fund managers suggesting that an investment in tobacco is sustainable. On the other hand, the bigger you get the harder it is to apply, as evidenced by Australian Super’s comments around the demolition of the Juukan Gorge formations by Rio Tinto Ltd (ASX:RIO).
Management of the $170 billion fund indicating they have ‘expressed their disappointment’ regarding the issue but will continue to hold the stock. These are cases in point as to why it is much easier to invest according to your own personal views and ethics if you do it yourself, whether via a share portfolio or SMSF.
Back to the point of this article, which was triggered by something I read in Barron’s recently regarding the 100 most sustainable American companies. The data used by Barron’s is prepared by a global funds management group called Eaton Vance, of which their Calvert division issues solely sustainable and ESG focused options.
As you would expect the analysis and reporting is constant, requiring regular review not only of companies but of what is important to the community in relation to ESG factors.
It was for this reason that issues like workplace diversity, data security and product quality carried increasing importance in 2020. Interestingly, 8 out of the 10 highest ranking businesses in terms of the Social factors were consumer facing or technology related.
The list is a who’s who of the fastest growing companies in the world, with particular highlights in my view, being the two semiconductor manufacturers that are driving the future of AI, autonomous cars and electrification, being NVIDIA (NASDAQ:NVDA) (ranked third) and Texas Instruments (NASDAQ:TXN) (sixth) who have apparently moved on from graphics calculators.
Also, in the top ten is Salesforce.com which anyone with a background in sales will understand, along with Hewlett Packard (NYSE:HPQ) and Tiffany and Co (NYSE:TIF). It’s clear these businesses have been working incredibly hard to improve their relationship with customers as well as the working conditions of their global employees. Interestingly, both Tiffany and Texas Instruments also fall into the top 10 ranking overall.
Two particular standouts for me and the stalwarts of many technology driven portfolios have been Microsoft (NASDAQ:MSFT) and Adobe Inc. (NASDAQ:ADBE) which ranked 42 and 29 in the social category and 14 and 12 overall.
Both are leading companies, delivering huge efficiency and cost benefits to businesses around the world, but doing so seemingly whilst treating their employees and customers well. One of the biggest issues highlighted in my analysis, was the real lack of options for ASX focused investors when it comes to ESG.
The companies that have traditionally screened the best in Australia are limited to property trusts like Vicinity Centres (ASX:VCX) and Sydney Airport (ASX:SYD) all of which have been heavily impacted by the COVID-19 shutdowns.
I’d like to leave readers with a difficult question; does an investment in artificial intelligence meet ESG criteria in light of the potential impacts on the employment of millions around the world?