We believe in having a portfolio full of these solutions, not just in energy but every sector of the economy. This gives us the potential for good long term returns, because these analog solutions are going to continue taking market share from their legacy counterparts. One day, solutions-oriented business practices will be the entire economy, and at that point we expect to have demonstrated good growth in our portfolio.
Ellis: I think most advisors would agree that’s what we’re always trying to do in the investment world. A couple questions I get from many advisors are, what parts of ESG analytics are material to a given company or economic sector, and once you’ve determined that, how do you measure the materiality through a consistent process?
Jabusch: Those are valid issues. There is no generally agreed upon methodology for measuring the materiality of ESG issues, but there are a number of competing methods for thinking it through. The real question for us is, “What are we trying to accomplish with our portfolio?” It’s about investing in and benefiting from the growth of solutions to systemic risk.
We think less about ESG ratings and more about what a company does to generate its revenue. Are they doing more to mitigate and help investors adapt to systemic risk than they are to causing it? Do they, in fact, represent the Next Economy? If so, then we can do the bottom-up quantitative analysis to determine if it’s an appropriate investment.
In a world where there is not yet a FASB or GAAP equivalent for sustainable investing that has regulatory authority, we believe that’s the best way to do it. It’s like putting yourself in the shoes of an economist 10 years in the future and looking back to see which companies are still in business that helped to create the de-risked economy, and which ended up on the discard pile of history.
Viewed through that lens the sorting criteria become quite clear to the extent that you can get under the hood and figure out where the bulk of a company’s revenues are coming from.
Ellis: What about investors and advisors who argue in favor of indexing when returns are competitive and expenses in an indexed portfolio are lower?
Jabusch: In general, lower expenses are good for investors, but I’m nervous about ESG rankings applied to every GICS category. That encourages the idea that one can select the top companies in any given sector and have a sustainable, blended portfolio without thinking about what a company does.
Some “sustainable indexes” include the top coal, oil and tar-sands producing companies. From this perspective the relative rankings of some sustainable portfolios worries me.
Our thesis argues that if you’re investing in companies that are causing systemic risk they will lose market share over time. For example, we don’t invest in coal or oil because we don’t see these companies fitting into the Next Economy. We don’t see oil companies doubling or quadrupling in value again, but we do think properly selected renewable energy firms and zero emissions transportation firms will experience that kind of growth.