The Right Track

From Leonard's Desk

Two recent new items caught my attention.

First, Starbucks recently closed its 8000 US stores for a day to provide racial sensitivity training to its employees.  The company took this action in the wake of incidents in which African-American patrons were assumed by mistake to be present in stores with criminal intent, and police were called.  Such incidents are not limited to Starbucks, but are reported every day all over the United States.  After all, “vagrancy” and “loitering” laws have a long history in the United States, dating back to the days after Reconstruction when (largely) Southern counties established laws designed to restrict the new rights of emancipated slaves.

In the other news item, the Department of Energy under the Trump Administration is reported to be developing plans to provide Federal taxpayer dollars to operators of coal and nuclear power plants to keep them solvent as their financial positions continue to erode.  In the past few years, coal has become uncompetitive as an electricity generating source as natural gas, wind, and solar have grown rapidly.  As a result, half of all US coal plants have closed in the past decade.  The Administration’s actions will be based on the argument that “national security” requires the ongoing operation of coal and nuclear plants; others (I included) would argue that national security is actually dependent upon the ongoing transition of the nation’s electricity grid to new cleaner and more efficient forms of energy (the market appears to strongly agree as no coal or nuclear projects are in the works).

Both of these stories illustrate environmental, social, and governance issues associated with business.  The investment industry’s early efforts to identify and invest in companies making conscientious efforts while avoiding unconscientious companies were known as Socially Responsible Investing (SRI), and funds and fund companies (such as Calvert Funds) were formed to meet early demand.  In the past decade, change has continued in this field.  SRI has evolved into ESG, Environmental, Social, and Governance, to more specifically define these major areas of focus.

New Capital has provided interested clients with ESG/SRI funds from the beginning in 2004, and we follow this investment sub-sector consistently, maintaining a research list of funds and discussing them regularly with our business partners who sponsor them.  In recent years there has been a proliferation of new ESG funds to meet market demand, and we regularly monitor new funds to see if there are any developing improvements.

There are several approaches to ESG, and New Capital employs them all depending upon client wishes:

  1. Active ESG, in which an active manager constructs a portfolio that includes companies and industries that pass the manager’s criteria and excludes those that don’t. This approach, like most active investment strategies, may also result in larger portfolio tracking error (divergence) from benchmark indexes (like the S&P 500).

  2. Passive ESG, in which a fund manager constructs a portfolio using ESG criteria and indexes from a third party provider, such as MSCI. This approach may reduce potential tracking error at the expense, however, of a stricter ESG mandate.

  3. Hybrid ESG, in which a manager may not draw strict lines of company/sector inclusion/exclusion but instead take a more nuanced approach and instead credit or penalize companies/sectors while still including them in the portfolio. This approach likely reduces tracking error even more and yields performance more in line with standard benchmarks.

There is no one size fits all with ESG.  Some clients are interested in ESG investments, and others are not at all, and either is perfectly fine.  Some clients may prefer one ESG approach over another, and that too is perfectly fine.  Regardless, if you have ESG goals that we can help you achieve, please let us know and we will be glad to help you make a plan.  And if you know others who would benefit from working with an advisor who can help them achieve their own ESG goals, please let them know about New Capital.

At New Capital, from a moral and ethical position we strongly support the action taken by Starbucks executives to enhance the awareness training of company employees.  I also believe their action is in shareholders’ best interests.  Starbucks took a negative and far outweighed it with focused, direct action to benefit all employees.  I am under no illusion that a single day of awareness training will solve centuries of corrosive racism.  But I know that single day was on the right track.  I am also under no illusion that disinvesting from companies will solve environmental, social, and governance deficiencies in companies (in fact, in many cases, disinvestment could have the opposite effect).  Still, I think efforts to closely monitor corporate ESG efforts are on the right track.

At a time when Federal government efforts to protect the national environment, the national commitment to social justice and civil rights, and the national regulatory governance framework are being withdrawn, others will necessarily have to step into the breach.  I believe they will, and that often, though far from always, some of the best progress being made in our society today is within the very companies in which you and I are invested.

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