As investors, we should want to know as much about the companies we are investing in as possible. The required bottom line quarterly earnings reports offer just a glimpse of what is available, if you care to look, and beyond this, the sad fact is that corporate earnings reports are often engineered, as clear and disappointing as that sounds.
I wanted to see past the fog, and so back in the 1990’s, I created a multi-factor model to measure the quality of earnings. More recently, as poor corporate behavior began to increasingly fill the headlines, I headed a team that created a new multi-factor model designed to measure corporate behavior, specifically the integrity and trustworthiness of a company. This exercise lead to the development of an investment strategy called FACTS®.
FACTS® identifies organizations with:
Sustainability / ESG (Environmental, Social, and Governance) Metrics
Over the last several years, there has been an increasing interest within the investment community around “ESG investing,” which looks at the Environmental, Social, and/or corporate Governance issues relating to companies and their management. Most investors tend to take a very personal approach, and may be interested in global sustainability issues, while others might focus on corporate governance. As there is such a varied approach, and also a wide discrepancy in the data investors are looking at, the questions arise, “Does ESG investing really work?” and “What do we really even mean by ESG?”
Perhaps ESG was simply mislabeled out of ease of use of an acronym. I think of ESG as an approach to better understanding the quality of a company. Even if we did not have a particular name for it, I think most investors would still want as much relevant information as they can have about the companies they are investing in.
I consider FACTS® a method to assess “quality,” through a lens of integrity and trustworthiness around a company’s operation. While others use their own particular screens and methodologies to find companies that meet their own “ESG” standards, the underlying concept behind FACTS® is that if management has integrity and trustworthiness, a company will likely rank highly on my scale and possibly become a portfolio candidate.
To create the FACTS® Portfolio, I use more screens than most portfolio managers would use to weed out public companies, continually motivated by the idea that more information is better than less.
For example, among other metrics, I examine:
The quality of the Board of Directors.
The conservativeness of the company’s accounting practices.
The relationship of the company to its community.
The relationship of the company to its employees.
The relationship of the company to its suppliers.
The sustainability of the company’s business practices.
For me, it’s crucial to not get caught up in analyzing who has the right label of a new style of investing. Do I think ESG is mis-labeled? Perhaps, but the more important point is to understand that the more angles we look at, and the more information we have about the companies we invest in, the better off we will likely be!
FACTS® is a registered trademark of Next Decade, Inc. Gitterman Wealth Management, LLC and Next Decade, Inc. are separate and distinct entities.