In recent years investing has increasingly been viewed as being about more than just optimizing returns and minimizing risks. Three additional concerns have been put forward when making specific investment decisions: Environmental, Sustainability, and Governance (ESG).
The challenge in applying an ESG model is that there are nearly as many definitions of these three terms as there are investors. So, what do they mean to us at CH?
We and our investment managers are deeply concerned with helping to preserve our world’s environment. This means that the companies we invest in must take a deep interest in engaging in the most ethical and best practices in their respective industries. This concern extends to how these companies manage the environment, as well as how they treat their employees and the local populations in the places in which they work. Put simply, companies that do not remain mindful of these issues will end up not only hurting the environment but time and again we have seen that they will do damage to their organizations and shareholders as well.
As with good stewardship of the environment, companies need to be aware of and plan for the long-term sustainability of their industry. A management team that seeks only to maximize profits in the short term is not only irresponsible, but as with poor managers of the environment, they will destroy the value of their company. Here we can think of historical examples like Lehman Brothers, an over 100-year-old investment banking firm that fell into the trap of maximizing its profits in the early 2000’s, yet lost control over its risk models. In the end this short-term focus on profits led to bankruptcy.
Essentially governance comes down to the systems, rules and processes that determine how a company operates. For us at CH we view this as the “culture” of the companies in which we invest.
Ultimately every decision a company makes will come down to the quality and vision of the people who run that company. Weak governance can lead a company into engaging in unethical and even illegal activities. History has taught us many times over that this strategy will most certainly lead to the demise of the company engaging in such activities. One need only think of past stories like Enron, Nortel, or more recently SNC Lavelin to learn the damage that can be done by poor governance.
At CH Financial we are driven by objective measures of our investments. This extends not just to profitability, cash flow and rates of return, but also to the ESG measures for all of our investments. In this way we seek to protect our clients’ capital and at the same time allow them to profit in the long-term sustainable growth of the global economy.
Brian Trafford, Chief Investment Officer
& Your CH Financial Team