Identifying environmental, social and governance risks may help avoid hard-to-see pitfalls.
The highest-paid position in football, by no real surprise, is quarterback. The average salary for a pro QB is $7.4 million, according to online sports research firm Spotrac. What may be surprising is the second highest-paid position: left offensive tackle, with an average salary of $6.1 million.
Left tackle rose to prominence in recent decades as football became more pass-oriented and defenses turned to blitz packages and speedy edge rushers to try to get to the passer before he could release the ball. To shield their quarterback from this onslaught, teams sought the best pass protectors they could get, usually on the left side, which for the typical right-handed quarterback is the side where he can’t see the pass rush coming. This evolution of the game was colorfully detailed in Michael Lewis’ 2006 book, “The Blind Side: Evolution of a Game,” which led to a movie of similar name that, incidentally, earned Sandra Bullock an Oscar.
Just as football has evolved, investing also has evolved. Both are faster than ever, with new technologies and much greater emphasis on data analytics.
Can you sense an investing analogy coming? OK, here it is: Integration of environmental, social and governance (ESG) analysis is the left tackle position. It can help protect an investor’s “blind side.”
Just as football has evolved, investing also has evolved. Both are faster than ever, with new technologies and much greater emphasis on data analytics. And much like pro teams were forced to adjust to a new breed of ferocious pass rushers, investors are having to adjust to a new potential pitfall: ESG risk. Of course, ESG risk is not really new. Investors always have been susceptible to poor corporate management. But today we recognize many of these errors as a lack of attention to financially material environmental, social or governance factors. Investors need to spot these weaknesses before they potentially damage their portfolio.
When ESG risks sneak up on the blind side, investors get sacked.
Think of major corporate scandals over the years that destroyed billions of dollars of market value in the blink of an eye. How many of these controversies encompassed data security, consumer safety, workplace harassment, contamination of waterways or poor accounting controls—all core environmental, social or governance issues for which investors got punished. As Warren Buffett once said, “It takes 20 years to build a reputation and five minutes to ruin it.”
The lesson: assessing whether you are investing in a quality business run by ethical management is just as important as other aspects of prudent risk management and security analysis, from scouring a company’s balance sheets to assessing industry trends and growth potential. And the only reliable way to delve into potential ESG risks is to engage the source directly, i.e., meeting with company executives and board of directors and helping them develop solutions for their shortcomings.
The point is that, for Federated Investors, ESG is not simply a distinct asset class or category of investments. It’s a comprehensive approach that can be applied to all investments. It’s the realization that companies committed to conducting business in a more sustainable manner tend to create better long-term value. Like any good teammate, effective ESG integration may help the whole team play better. Paying attention to ESG factors not only may mitigate risk but also may lead to other beneficial outcomes.
Greater emphasis on corporate stewardship and investment responsibility helps create an environment more conducive to positive change, where market forces help set off chain reactions, potentially making good things happen.