It is easy to lose sight of the reality that when we buy shares of a company, we become, albeit in a small way, an owner of that company. Since most of us don’t want to own firms that do nasty things, it is not surprising that one of the undeniably “hot” areas of investing these days is responsible investing, with a focus on Environmental, Social, and Governance (ESG) factors. Surveys of mutual funds and Exchange Traded Funds indicate that as much as $20 trillion world-wide is currently invested in products that, at least on paper, include an ESG component. As the name implies, responsible investing includes not only the usual fundamental and market analysis in considering companies; it also involves consideration and weighing of ESG factors based on a set of criteria which is, by its nature, particular to each investor or investment fund.
Socially responsible investing is not a new concept for Baskin Wealth Management. Since our founding, we have intentionally avoided investments in companies that partake in four activities: online gambling, manufacture and sale of tobacco products, manufacture and promotion of pornography, and manufacture and sale of firearms.
That being said, there is no set definition of social responsibility. Apart from direct violations of the law, who’s job should it be to decide what is or isn’t socially responsible? In a diverse society, people have different values and beliefs. For example, many people believe strongly that legalizing recreational marijuana is the right thing to do, while others believe equally strongly that this would be a disaster for society. This is why, apart from the above restrictions, we allow our clients to dictate their own investments restrictions as they see fit rather than utilize any 3rd party ESG models or rankings.
The impact of responsible investing from an investment returns perspective is also unclear: some believe that responsible investing has historically lead to superior returns, while others argue that investing based on ESG factors logically results in inferior returns. My two cents: picking investments purely based on one’s personal ethical worldview while ignoring business fundamentals is unlikely to be successful. However, many ESG factors are intrinsically linked to the financial factors that traditional investment analysis incorporates. When analyzing a company with a view to holding the stock for many years, it is very important to understand the potential risks that may arise from an ESG perspective. Would any long-term investor want to invest in a chemicals company that does not take environmental considerations seriously? In our experience, management that carefully considers ESG factors tend to be longer-term thinkers regarding their business strategy.
Here are some practical examples:
We recently purchased shares of a company called Parkland Fuel (TSX: PKI.TO) for some of our clients. Parkland Fuel is one of the largest independent distributors of gasoline and fuel in Canada. Although we were impressed by management’s strategy and track record of execution, the most significant risk factor we identified during the research process was the potential for environmental liabilities due to soil and water contamination and consequently, the need for expensive site remediation. We made the decision to invest only after we felt comfortable that Parkland’s management takes these issues seriously and is proactively preparing its business to succeed in a low-carbon world.
One of our best performing stocks for clients in recent years has been Waste Connections (TSX: WCN.TO), which is one of the largest garbage processing companies in the United States. Waste Connections makes employee safety a clear priority and has the lowest employee accident/injury rate and the lowest employee turnover in what is identified as the 5th most dangerous industry in the United States. In fact, Waste Connections prioritizes employee safety over getting new customers and frequently turns away business that it feels is dangerous for its employees. The financial performance of this strategy has been obvious: Waste Connections’ financial results and stock price have far outpaced its competitors and the broad market indices over the last decade.
