There once was a time when investors paid little attention to the inner workings of a company. As long as they delivered profits, it didn’t matter how they treated their workers, who they did business with and what their footprint on the planet looked like.
But times have clearly changed, and the rise of ESG (and socially responsible) investing has put a spotlight on many companies’ less-than-desirable activities, whether they involve questionable labour practices, funding foreign wars or financing fossil fuel development.
Socially responsible investors are increasingly looking for ways to screen out controversial companies from their investment portfolios—and our Fossil-Free and Impact funds do just that.
What’s driving the shift away from controversy?
This shift has been driven by three factors, says Mike Thiessen, Chief Sustainability Officer and Co-chief Investment Officer at Genus. First, socially responsible clients want to make sure there’s alignment between their values and their investments. “Clients don’t want to be investing in companies that have controversies around labour, environment, governance, or in the communities where they work.”
Secondly, there’s a financial component. “Companies with widespread controversies that haven’t been resolved face long-term risk,” says Thiessen. “So much of a company’s value is tied into their brand, and if their brand is damaged by a controversy, that could significantly lower their market value.”
Even one controversy can have a lasting impact. Take the Volkswagen emissions scandal, in which the company admitted to cheating on pollution emissions tests; it led to a significant drop in Volkswagen’s share value—over 20% within days—while a global recall of 11 million vehicles cost the company nearly seven billion euros.
Finally, there’s also the question of risk management, says Thiessen. There may be “other things going on beneath the surface” that Genus and its investors can’t see.
Our formula for controversy screening
At Genus, we use a colour-coded system (developed by MSCI ESG) for dealing with controversies—covering a range of issues under the pillars of environment, human rights/community, labour rights/supply chain, customers and governance.
Green means there are no significant controversies. Yellow means there is something minor worth flagging. Orange means moderate controversy, or something that is more widespread. Red means serious controversies, and the company is excluded from consideration. “Initially we started only cutting out companies that had the most severe controversies,” says Thiessen. “And then, in the past six years or so, we’ve started cutting out companies with numerous moderate controversies as well.”
A good example of this is Tesla—which was once in the Genus portfolio, but because of a variety of labour incidents that fall under the “orange” banner, was dropped a couple years ago. It started with allegations of racial and gender discrimination within Tesla factories, says Thiessen, but since then the controversy has extended to concerns about governance, product safety and the automaker’s supply chain. “With Tesla, right now, it’s a buildup of a lot of those moderate controversies,” says Thiessen. Other big companies—such as Apple, Amazon and Alphabet—are also screened out, he notes, because of several moderate controversies.
Genus relies on initial screen from data partners Sustainalytics and MSCI to help weed out the offenders. But for companies in the financial sector with environmental and carbon-related controversies, there is an additional screen Genus employs. “We have a stricter threshold when it comes to financial firms, because of their influence in funding a lot of controversial projects.” That means companies like RBC—ranked as one of the world’s largest funders of fossil-fuel production—are screened out. In addition, Genus screens out companies with any Indigenous-community controversies.
While we largely rely on our data partners for these screens, Thiessen says that Genus makes its threshold for exclusion more strict for certain industries “if we find that there are too many controversial companies getting through the screens that don’t align with our clients’ values.”
How controversial companies can turn the tides
Even after getting screened out, though, companies can make it back into our portfolios: Tesla, Thiessen notes, has been on and off the screened out list, depending on how it resolves its controversies. Sustainalytics and MSCI are constantly updating their screens, he says, “especially with the larger companies, because more investors are wanting information on them.”
We rebalance our funds on a monthly basis, so if a company is in the penalty box, it will stay there for at least a month – or until the controversy is resolved. Also worth noting: Sustainalytics and MSCI typically only update their controversy scores every six months to a year, adds Thiessen, “because they want to see that change is actually happening within the company. They don’t want to be constantly altering these ratings.”
An example of a company that’s currently screened out, but which may make its way back into the Genus portfolio, is Microsoft. “They had controversies around labour, harassment and discrimination against employees within Activision Blizzard, the company Microsoft recently bought. So they inherited controversy,” says Thiessen. “But I imagine Microsoft will come back.”
As long as an investment runs contrary to the values of our investors, we will exclude it from our Fossil-Free and Impact funds. And for responsible and sustainable investors, that’s the just the peace of mind they need to ensure their investments are making a positive difference (or at least less of a negative impact) on the planet.
Interested in ensuring your investment portfolio aligns with your values? Get started today with our digital and personal wealth management services.
References:
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