There is some confusion around the terms and methodologies behind SRI (socially responsible investing), ESG (environmental, social, governance) and impact investing. If they all exist on the same spectrum, where does one begin and the other end? Maybe even more interesting a question is should we be looking at them separately at all? While these approaches have initially seemed as maverick exercises and an eclectic approach to stock selection, in today’s business environment, shouldn’t they really be seen as part of the natural evolution of the investment analyst’s corporate management research process? Do they not add a series of new astute business analysis factors that will add value and another dimension of “margin of safety” to clients’ portfolios?
To answer these and other questions on a rapidly mainstreaming investment approach, the Institute for Innovation Development reached out to Norman Conley III, CEO and CIO of JAG Capital Management—an independent, 100 percent employee-owned registered investment advisor headquartered in St. Louis, Missouri that has a long history of working with investors focused on SRI and ESG issues.
Bill Hortz: What do you see as the difference between ESG, SRI and Impact investing and is there a different investment methodology between them?
Norman Conley: JAG Capital Management has been a socially conscious investor throughout its 70-year history. For a firm with many decades of experience in this area, it’s curious to see scores of our fellow asset managers newly embracing social concepts. We see ESG and impact investing as an adaptation of what we’ve historically tried to accomplish on behalf of our clients.
Socially responsible investing (SRI) methodology limits the size of a potential investment universe by omitting the stocks of companies operating in businesses deemed to be socially offensive. Stocks in the tobacco, liquor and weapons manufacturers and distributors are frequent omissions. There have been times through the decades when eliminating investment choices in these areas has impacted investment performance to the negative. Partially as an outcome of those times, our experience is that clients have gotten increasingly specific on areas to avoid. For example, weapons would be refined to “offensive weapons,” or liquor omissions would be amended to only exclude “hard liquor.” These exclusions have increased the size of the SRI investment universe, but added to the confusion in the category.
Environmental, social and governance (ESG) has flipped the process for social investment screening from exclusion to inclusion and from a simple screen to a core business due diligence exercise. The ESG philosophy broadens both the social investing and business management considerations. The method essentially says that all companies have some social merit, and that one can and should target investments to those with more social merits than others; that have a more expansive stewardship built into their business decisions and management processes. No companies are omitted from consideration, but nearly all companies in an investment universe are scored and ranked according to their social accomplishments in key areas.
Impact investing constitutes shareholders and some investment managers attempting to encourage corporations to improve outcomes for their employees, customers, and communities. This can be accomplished through providing capital, voting proxies and outright activism. While JAG prefers to focus on due diligence instead of activism, we do insist that our clients have equal voting rights. One avenue for influencing corporate management teams is through voting shares. Many public companies, including some big ones like Facebook and Google, have A and B share classes, where A shares are available to the public and B shares have voting control. Meaningful voting rights are necessary for impact in our opinion.
Hortz: Why and how have you chosen to integrate ESG into your investment process and firm brand?
Conley: SRI has been integrated into our investment process for decades, and it continues to be integral to what we do today. However, as ESG processes and tools have emerged, we have adopted them into our research platform. We created a section of questions in our qualitative research interface to require our analysts to consider ESG issues and incorporate ESG into individual company analyses. JAG believes that such social investment considerations lower risk in our portfolios.
Alongside our development of social investing tools, we work to improve our own corporate social presence. JAG is a signatory to the UNPRI, the United Nations social responsibility agreement, which requires us to report on our sustainable investing activities, and we are a member of the Midwest Coalition for Responsible Investment. Moreover, we have drawn focus to our own impact, especially related to local charity work.