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Investors of all types are increasingly seeing the merits of being more active and aware. Intangibles that go beyond traditional financial measures, such as how companies protect the environment, promote fair treatment of people and practice good corporate governance are becoming mainstream ingredients in analyzing companies.
In this recent MarketWrap feature interview with Moe Ansari, George Putnam detailed the potential stock profit advantages to be found in "ESG"--Environmental, Social and Governance--investing. Once dismissed as irrelevant or even a detractor from good investment returns, there is a growing body of evidence that shows this ESG (aka "sustainable," "socially responsible" or "impact") approach actually contributes to better returns over the long run.
Putnam explains, "Management that is focused on these ESG issues and tries to do the right thing is likely do the right thing by shareholders over the long term, as well." He continues, "ESG generally reflects well on the management team, and a well-managed company will probably do the best over the longer term."
The logic is simple: If management is paying attention to ESG issues, they probably are paying attention to all the details of their business and are likely to be running it better. On the other hand, companies that ignore ESG issues may be taking risky short-cuts that could lead to lower long-term value and much higher legal and reputational costs. Many investors see the benefit in this approach, as nearly $7 trillion is invested in U.S. equities using ESG principles.
At The Turnaround Letter, we believe that ESG analysis is an important tool for successful long-term investing. We not only want to understand a company’s current ESG status, but also where it is headed. In many cases, we have found that companies with weak but improving ESG practices can be outstanding investments. Turnarounds in ESG practices often go hand-in-hand with turnarounds in financial results.
The MarketWrap interview goes on to detail several companies that score well on ESG practices and also have strong elements of a turnaround in their financial performance. Putnam concludes, "It can be very rewarding--both economically and in terms of feeling good--investing in these kinds of companies."