ESG investing: Focused on performance and materiality

John Streur, President and CEO, Calvert Research and Management

Bethesda, MD - More and more investors are getting interested in responsible investing, but there still is a lot of confusion about this fast-growing segment of asset management.

For example, there is even little agreement on what to call this space. Investors may have heard of socially responsible investing (SRI), environmental, social and governance (ESG) investing, green investing and sustainable investing - just to name a few.

You don't have to settle for less

There is also a misconception that investors will necessarily sacrifice performance if they want to invest responsibly. We couldn't disagree more.

At Calvert, we think responsible investing and research should focus on ESG factors within the context of financial materiality.

So what does this mean, exactly? It means differentiating businesses and corporate management teams based on their capabilities to deal with rapidly evolving environmental pressures, natural resource constraints, workforce requirements and broad societal needs in ways that reduce risk and may create competitive advantages.

Introducing materiality

We're looking at how ESG factors such as energy source, supply chain management, environmental impact, community engagement, workforce diversity and many other important factors funnel into the company's financial outcomes. This, of course, impacts business results, stock prices and more. We believe most investors haven't yet realized the value of this, which we call "materiality."

This is a very different approach than traditional SRI, which uses negative screens to eliminate companies engaged in certain industries such as tobacco and firearms. Instead, we gather information on companies to develop a complete picture of their behaviors to examine and compare companies across sectors. We find information not only on how a company is impacting society and the environment, but also information useful to understanding the risks the company may face, and potential impact on financial performance.

Not all ESG factors and strategies are created equal

Can ESG underperform? Certainly. But we think some investment managers aren't approaching it correctly. They're not focused on the right things. Our advantage is that we use ESG research to create passive indices or to combine with traditional fundamental analysis of a company's financials. We identify metrics that are more materially linked to company performance and stock prices.

We look at what's happening globally with companies that are committing more time and expertise to sustainability in ways that work for the population and shareholders. We're interested in companies that can do both. It's a feedback loop, and it means something to stock and bond prices. Doing this the right way involves acquiring, stewarding and analyzing large amounts of data with a focus on materiality

We work hard to create universes of securities that exclude companies that are not managing environmental and societal risk well. Conversely, we include those that are demonstrating superior skill and positioning in these increasingly critical areas. Combining this work with traditional bottom-up security selection has every bit as much chance of beating the market as any other approach.

Bottom line: Today, we know that more investors want to invest with purpose and meaning, to achieve something important in addition to financial return. Helping these investors to fulfill their mission, and doing it in a way that produces appropriate financial results, is the driver for the design of our research processes.