The Evolution of SRI (Part 3/3)
Environmental, Social and Governance (ESG) measurements give portfolio managers and investors unique insight into how companies operate. It’s another data set you can pay attention to when making an investment decision.
There is speculation that some of the success of ESG investments comes from central governments providing incentives in economic areas considered to be “green”, like alternative energy. Certainly government spending has an influence on the real economy -- if a government pursues large infrastructure projects, it is likely that companies that participate in those type of projects will be the beneficiaries through increased business, increased cash flow, and potentially higher share prices.
More acronyms.
Central governments around the world have been encouraged to support SDGs (Sustainable Development Goals). Indeed, the United Nations adopted The Sustainable Development Goals in 2015 as “a universal call to action to end poverty, protect the planet, and ensure that by 2030 all people enjoy peace and prosperity.”
Seventeen goals have been identified, and governments are encouraging investment in areas to address each of these concerns.
From an investment perspective, it’s often useful to “follow the money”. If global governments are providing tax incentives or direct investment into these goals, business development will follow. Companies will be created and grow in support of these objectives, because there is an economic opportunity to take advantage of.
Take Goal 6: Clean Water and Sanitation. In 2017, the Canadian federal government announced the Clean Water and Wastewater Fund. This initiative sets aside funds to invest in technologies and infrastructure that provides communities with reliable sources of potable water and wastewater systems to keep it that way. As an investor, businesses that are in the “clean water” or “sanitation” business could be poised to do well as government has earmarked funds specifically in this area. With government money flowing into a sector, it can help companies grow, innovate and develop. Again, there is no guarantee that clean water companies will perform well financially over time, but this stimulus increases the possibility.
Investing alongside these type of goals may provide a win-win-win. Providing access to clean water can help vulnerable communities by decreasing chronic health issues, which can reduce government health care expenses, and permit increased investment in infrastructure or (I can dream) a reduction in income taxes.
SDG are not investment goals. They are societal goals that influence government spending and the flow of capital, which may influence how different economies, asset classes, and investments perform over time. Regardless, it’s another acronym demystified and another thing to consider when constructing an investment portfolio.
The opinions expressed are those of Craig Swistun and not necessarily those of Raymond James Investment Counsel which is a subsidiary of Raymond James Ltd. Statistics and factual data and other information presented are from sources believed to be reliable but their accuracy cannot be guaranteed. It is furnished on the basis and understanding that Raymond James is to be under no liability whatsoever in respect thereof. It is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities. Raymond James advisors are not tax advisors and we recommend that clients seek independent advice from a professional advisor on tax-related matters.