I recently was invited to a think tank hosted by Eventide Asset Management, a company in the values investing space. CIO Finny Kuruvilla gave a talk and I was confronted with the question, “Do you want to own companies that you are proud of?” Well, of course I do. But truth be told, I haven’t been paying that much attention. Kuruvilla defined good corporations as those that treated their workers well, which in turn engendered happy clients, demonstrated community-mindedness, environmental responsibility, etc. In short, it meant owning companies that produce goods and services for the good of people. Sounds easy, but it’s not. The degree of due diligence required is onerous and ongoing, and the indicators are not always obvious.
We see a broad range of values-driven investment choices today, including, but not limited to:
• SRI (Socially responsible investing);
• ESG (Environmental, social, governance investing); and
• BRI (Biblically responsible investing)
There is a whole subset of questions beyond the one asking whether I would be proud to own a company:
• Would I want to work for it?
• Would I recommend its products?
• Would I want my kid to work there?
• Would Grandma approve of the company’s working conditions and atmosphere?
What value does it bring? (There’s a broad range of value out there, from new flavors of bubble gum to potential cancer cures.)
Some companies strive to deliver value, while others exist only to extract it. Extractors are the companies that the ESG movement is trying to weed out. Why would any of us want to support firms that don’t care about anything or anyone? Fred Reichheld of Bain Consulting said the following thing about such companies:
“Instead of focusing on innovations to improve value for customers, they channel their creativity into finding new ways of extracting value from customers.” Such companies, he says, “regard the people who buy from them as their adversaries, to be coerced, milked or manipulated as the situation permits. The Golden Rule—treat others as you would like to be treated—is dismissed as irrelevant in a competitive world of hardball tactics. Customers are simply a means to an end—fuel for the furnace that forges superior profits.
“This view is utter nonsense. Companies that let themselves be brainwashed by such a philosophy are headed into the sinkhole of bad profits, where true growth is impossible.”
Scrambled Signals
In our modern age of values-screened investing, one could be forgiven for incredulity when it comes to getting truth from corporations and knowing their actual behaviors. Don’t all corporations try to say the right things, give the proper appearance and elevate their standing in the global community? Don’t values range wildly from one individual to another, and from one credo, culture and affiliation to the next?
Consider that one ESG data vendor gave Philip Morris a higher score than Loxo Oncology (bought out by Eli Lilly and Company in 2019) because the ESG screens heavily weighted clean water and board diversity. Rather ironic that it’s for a tobacco company producing products that science has proved cause cancer, while Loxo has gone to market with a potential cure. Yet the party causing the problem is rated higher in ethics, sustainability and governance than the party with the cure. Excuse me while I scratch my head for a moment and wonder how “values” have become so perplexingly scrambled. According to an executive at this gathering, one of the big weaknesses with ESG historically is that it does not consider the products or services of the companies, but focuses instead on their sustainability “practices.”
I suspect that we will soon see progress in the filtering process as well.
Locate Your Values
Everyone has to choose what matters most to them personally. Eventide sets its searchlights on companies making strides in health care, cybersecurity and clean water (among other things) around the planet. One of its investments is a company that came up with a new treatment for schizophrenia that impacts 3 million people in the U.S. This disease is a leading contributor to homelessness (and the subject resonates with me, as my older sister struggled her whole life with it).