Multiple Lenses of ESG Integration

Robert Milano Ryan, one topic that’s coming up more and more frequently is ESG, or environmental, social and governance, considerations and how they fit into the investment process. There are a number of different ways that you can integrate or incorporate ESG considerations into investing. One of which is ESG integration. Can you talk a little bit more about that for us?

Ryan Oden ESG integration essentially means explicitly considering ESG factors or information in your research and investment process. That is both on the opportunity side and the risk side. Our approach to ESG integration is not one of exclusion or screening, meaning these are the 10 issues that we will never invest in. Our approach is one of engagement and exploration—to understand the full ecosystem of an opportunity or a risk within any sector or industry or business.

Robert Milano Historically, governance concerns have been easier to quantify. You can look at tenure of board members. You could look at the number of boards that board member serves on. What’s harder to quantify and harder to really analyze are the social impacts that a company might be having and also the environmental impacts. Can you give us an example of each of those and how that’s played into the investment process?

Ryan Oden Under the social category, one of our primary focuses is company culture. It often underpins everything else that a company does. One of our areas of focus is human capital management. And within that, how do you treat your people. So we want to know how do you pay them. How do you develop them. What training is available and what are the benefits. We were recently speaking to a consumer company who pays its employees two to three times more than peers, spends two to three times more on training and development, and gives a wide array of benefits that peers don’t. Now, you might take a step back and wonder, Doesn’t that take a hit to profitability? And, actually, the inverse is true. They are one of the most profitable within their industry. Why is that? Well, the cost of acquiring an employee, hiring them externally is 30 to 40% more costly than doing so internally. And what that leads to is a longer tenure of an employee who is more effective at doing their job and often has a dramatically increased productivity.

Robert Milano Fantastic. And so how about on the environmental side. Do you have an example of how that’s impacting the investment process as well?

Ryan Oden Environmentally, we look at several factors. A primary factor is how are you optimizing the supply chain to affect the environment. We recently were speaking to another company that has a dedicated role of supply chain sustainability management. And what does that person do? They do three things. They look at GHG [greenhouse gas] emissions of the factories that are making the goods that they sell. They are looking at the packaging that those goods travel on. And they are looking at the labor and the labor conditions that those who make those goods are within. And what we found was something that was kind of astonishing. They are measuring every component of water usage, of air quality, of greenhouse gas emissions, of the effect of the packaging on the consumer and the consumers market upon reception and potentially discarding. And what that has caused them to do is change behavior in every step of the value chain that has positively impacted both the financials of the company and the environment more broadly.

Robert Milano One last question for you. So how do you think about the evolution of ESG considerations in our investment process?

Ryan Oden I think that we will be looking through multiple lenses. So looking at governance through an environmental lens, looking at environment through a social lens and looking at all of ESG under an umbrella of culture as company culture persists as a material factor within the entire investment process.

Robert Milano Thank you.