🔎 Market Mysteries

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Yes, but you have to wade through the noise and marketing if you really want to feel good about your investments. Investing in companies that treat their employees well, follow the law, respect their customers, and limit their waste is a reliable model for success. The difficulty lies in the ability to identify companies operating that way. Environmental, Social, and Governance (ESG) metrics provide some insights into these aspects of responsible business behavior but fall short of effectively evaluating corporate social or environmental impact. ESG metrics have a lot of value, but they can often be misunderstood, misleading, or misused.

It’s not easy. Companies are more than a stock price. No company represents a particular set of values. None is perfectly sustainable or perfectly inclusive, and none is both. The best thing we can do is try to evaluate their decision-making to identify companies we believe are making responsible choices to treat their employees, customers, communities, and our planet with respect.

Here are three ways to think about aligning your investments with your values:

You can cut out the stuff you don’t like. Excluding certain companies or industries from portfolios makes it a little bit harder for them to succeed. A company’s stock price is driven by demand. When more investors want to own that company, the shares get more valuable. A strong stock gives companies more financial power to achieve their goals. As an investor, you must be mindful that exclusion is the opposite of diversification. Be aware that the fewer companies and sectors you invest in, the riskier your portfolio gets.

You can focus on specific social or environmental outcomes, aka true impact investing. There are companies whose revenue aligns precisely with a particular outcome, like a solar panel company, water infrastructure project, or education initiative. While there are more kinds of single-focus investments in the startup world, you can find some on the stock market to add to your diversified portfolio.

You can try to allocate your money to companies acting responsibly with their resources, employees, and operations. This strategy is the most applicable across your entire portfolio, but it's the most difficult to execute due to the lack of accessible financial information. It's also where Environmental Social Governance (ESG) metrics come into play. How do we evaluate whether companies are making good decisions? The secret's in the data but not in the ratings. 

ESG is relatively new, confusing, and insufficient, so it frustrates everyone. Within the past few years, ESG has propelled into the center of American culture wars. The term has been misunderstood as a synonym for sustainability and diversity and warped into conspiracy theories about ESG ending life as we know it. Simply by offering funds with ESG considerations, the largest investment fund managers have been plunged into battles with Republican states pulling their assets while climate activists with pitchforks storm their lobbies. Everyone is angry about ESG.

Environmental Social Governance metrics are simply a tech advancement in data collection. They evaluate risks to a company’s profitability from drought, poor employee benefits, weak accounting controls, and a wide range of other real-world influences on a business’s operations. These are things businesses have always worried about and understood to affect their success, but now we can measure them. This technological advancement comes while risks are rising. Water scarcity, deforestation, climate change, social unrest, pandemics, rising living costs, you name it. Business is changing rapidly. Executives have stepped up ESG data analysis because it’s practical, not because they woke up with some newfound activist or altruistic impulse. Investors call for more disclosure to understand how companies address these risks.

ESG evaluates how the world impacts the company, not how the company impacts the world. ESG is not a measure of how "good" a company is, but it's not meant to be. For instance, a water stress metric evaluates whether the locality has enough water to support the company's operations, not whether the company is consuming a damaging proportion of the community's local water supply. While a high rating in that area can represent an executive team taking steps to increase their water efficiency and minimize waste, we don’t necessarily know whether it’s draining a valuable aquatic ecosystem or endangering biodiversity with its consumption.

In an effort to simplify ESG data, financial companies made things more confusing with their rating systems. Available water supply, for instance, is much more important for an agricultural business than an accounting firm. Financial companies like MSCI created their own ABC ratings on top of the metrics, deciding what risks are more material for one industry vs. another. The different rating systems are inconsistent and opaque, stirring distrust.

ESG ratings are focused on profit, not attacking companies. Despite claims of victimization, oil companies don't have bad ESG ratings. On its low-to-high scale of CCC to AAA, MSCI rates energy giant Shell as AA, BP as A, Exxon as BBB, and Chevron as A. Looking at another industry, McDonald's, the world's largest beef purchaser, was responsible for more emissions than Portugal in 2019. Despite minimal action to address supply chain emissions, MSCI evaluated McDonald's environmental practices and improved its Environmental rating for installing recycling bins at various locations (most where it would face sanctions for not recycling). MSCI's ratings are more concerned with McDonald's avoiding fines than reducing its most significant impact on the environment. ESG ratings are related to sustainability because responsible resource use is good for business, but they are not the impact metrics you're looking for. 

Your investments are already having an impact. Companies decide our fate much more than we realize. We determine which companies succeed every day, investing with our purchases, employment, stock ownership, and opinions.

Companies with solid values perform better. Those prioritizing their workers have outperformed the rest over the last five years. Sustainable companies succeed and will continue to as our planet’s challenges get more brutal.

While we might not be able to make a considerable impact individually, these things add up. As smaller-dollar investors, we can choose fund managers who will use their collective size to influence corporations from within. A fund manager who owned less than 0.02% of Exxon recently rallied shareholders to force the company to adopt a clean energy strategy and new board members.

It’s still tricky. Corporate transparency is rising, but it’s still new. Scoops is working to accelerate access to this kind of info. Sign up to beta-test our new app with data on how thousands of companies impact their workers, communities, and our planet. Use this information to inform where you work, shop, and invest. These decisions make a difference.

By following companies’ pledges, progress, and actions, we can hold them accountable to a longer-term vision of building a more inclusive and sustainable economy. Vote in your Scoops to affect companies’ approval ratings - our feedback loop on Corporate America. We’re building toward direct conversations with executives at the world’s biggest companies so that your opinions can directly influence strategy and policy.

Keep building,

The Scoop Team