Take the discussion within the report’s pages about McKesson Corporation and Cardinal Health Inc., two of the largest drug distributors in the United States. In the midst of the opioid crisis, Parnassus has held talks with the two companies to address allegations that they neglected their legal obligation to monitor controlled substance distribution and prevent suspicious orders from being shipped. “Following these discussions, we concluded that the responses of both companies were insufficient and too slow given the growing scope and urgency of the problem—and we sold both holdings,” the report says.
But the fund’s opioid discussions with another major drug distributor, CVS Health, led to a different result: Parnassus held on to the position. Why? “The head of corporate social responsibility at CVS revealed that this company is addressing opioid abuse, both behind the pharmacy counter and with the patient community. CVS is monitoring and enforcing limits on prescriptions, training pharmacists and offering safe drug disposal receptacles to the public,” Parnassus said.
Parnassus says it looks at a company the way reporters would to get a 360 degree view. “Sometimes,” says Essayas, “the ESG team and I, we kind of joke about us being investigative journalists because we have to do a lot of deep dives on companies. Since the ESG data and ESG stories are not standardized, you can’t just go to the Bloomberg and say, ‘Give me the whole ESG story about a company,’ or ‘Let me get a sell-side report from J.P. Morgan on the sustainability aspect.’ And so we have to pull from a whole bunch of different sources. And sometimes the sources are media reports, sometimes they are the companies themselves, and a lot of times they are from journalists who are just covering the company, maybe at a local level. And so you have to do these deep dives to really get the granular information to come up with your assessment of that company.”
Before engaging the companies, the fund does its ESG analysis like this:
First it uses a screening process that filters out alcohol, tobacco and weapons companies; gambling operations; and companies generating electricity from nuclear power. Next the fund makes a qualitative assessment that takes into account key ESG factors: “On the environment,” says Essayas, “we’re looking at a company’s carbon footprint, we’re looking at a company’s energy and water usage, we’re looking at if the company has any kind of life cycle thinking of the product, we’re looking at the company’s waste stream.”
The fund also looks at a company’s workplace issues, such as employee retention, safety and executive compensation. “Once we’ve done that qualitative assessment on the companies, we’ll provide a formal recommendation to our chief investment officer,” Essayas says.
If the recommendation is accepted, the company’s stock is bought, and the ongoing monitoring process kicks in. “We’ll look for significant ESG positives, any kind of negatives such as controversy. And then just to double down to make sure we didn’t miss anything, we’ll actually do a formal annual review on the company going back one year. And then again using our ESG research to highlight engagement opportunities,” Essayas explains.
It’s during this process that red flags often appear. McKesson, for example, flashed warning signs when its management launched an executive retention program. “That took us by surprise,” Essayas says, “because we were knee-deep in this opioid crisis … and then you have McKesson coming in saying, ‘Hey, we want to introduce this brand new executive retention program.’” It would likely mean executives were planning on bailing from the company, and it prompted Parnassus to sell off more of its position.
As an intermediary, Parnassus carries a lot of weight with companies. It also is aware, however, that its shareholders are the ultimate ESG judges; the fund is beholden to them and that means it too must be as transparent as possible and show the steps it takes to keep companies honest. Just like Diogenes’s lantern that, according to legend, shined a light upon the wicked and the honest, Parnassus is looking to spotlight ESG issues for its shareholders.