Starting with factor environment, What we are going to be interested in knowing is how the company is linked to the environment. Therefore, when we analyze the impact that the activities of companies may have, we will look at aspects such as their climate change policies, their energy consumption, the amount of waste they produce, their level and types of pollution, the conservation of natural resources , dealing with the flora and fauna of its environment, and other issues of the style.
Thus, our approach to analysis will be two-sided. On the one hand, we will focus on the activity carried out by the company we are analyzing. Logically, It will not be the same for us to allocate our capital in a company that is dedicated to the oil industry than one involved in the generation of renewable energy. On the other hand, we will examine the indirect effects of the activities of each company.
Nor will we be indifferent when choosing between a company that manufactures combustion cars and one that manufactures electric cars, given that the use of each of these cars will produce unequal levels of pollution. Anyway, our greatest interest will be in the global footprint of the company, and in this regard there is another measure to explore.
For example, focusing on the carbon footprint in particular, although reducing the emissions generated by the activities to zero is practically impossible, companies can achieve a net zero emission. How is it possible? Through carbon sequestration projects that counteract the portion that cannot be eliminated due to the type of activity. Vista Energy, from the Oil & Gas sector, is an example of this. VIST made explicit its intention to be carbon neutral by 2026 by reducing its direct emissions while embarking on reforestation and soil carbon sequestration projects for the remainder, demonstrating that the sector may not generate greenhouse gases.
Heading for orbit Social, we’ll want to see how the corporation we’re reviewing performs in its community in terms of diversity, human rights, and health care, among other things. Again the analysis branches off into direct and indirect consequences of their actions.
First of all, we are interested in how the company relates to its employees, its customers and the community in which it operates. Then, we are also interested if it promotes its same standards in companies linked to it, such as suppliers, promoting greater social welfare.
Specifically, if we see that a company employs minors or has strenuous working hours, adhering to ESG standards we will avoid it, just as we could avoid companies that are linked to it. Going to experience, Apple for several years was criticized for being linked to Foxconn, a Taiwanese company with practices that bordered on the inadmissible, generating a considerable number of suicides among its employees.
Thirdly, the last letter of the acronym, which refers to the governancealludes to the corporate governance of the company, that is, it judges characteristics such as the structure of the board of directors, the rights of the shareholders, transparency in the management, auditing and internal controls, and other such matters. In a nutshell, what we will look for is that the incentives of the management of the company are aligned with the interests of the shareholders and other interested parties.
Consequently, we will look for companies that vote on the board of directors on a single date and not staggered or that have a cumulative voting system, giving retail investors greater opportunities. We will want companies that are transparent, and do not engage in fraudulent activities or that involve a conflict of interest. It is also advisable to delve into remuneration schemes for managerial positions. In this sense, a remuneration scheme that includes part of the remuneration in shares or options will help employees share the interest of enhancing the company’s market value.
After learning what each of these three letters represent, the reader should ask themselves why they should interest them in terms of return, beyond any ethical or moral reflection. The reason is simple: this theme is not a trend, nor is it temporary. It is the axis on which corporations will be shaped in the future. Thus, not directing efforts to improve in terms of ESG impacts both the risks and the potential returns on investment.
Starting with risk, we highlight both the physical and operational risks to which these companies will be exposed. In this sense, not facing the transition in time could lead to having to do it more quickly and at a higher cost. Let us imagine that the world drifts into a dynamic where the amount of possible emissions per company is limited. It could happen that a portfolio company exceeds its carbon emission limit and is fined or must resort to a carbon market to buy emission capacity, affecting its valuation. In second place, liquidity will be an important issue.
On the one hand, the actions of companies that are not interested in their environment could no longer be required, affecting their price. At the other extreme, the growth in demand for assets whose underlying business does have an ESG orientation has been exponential. We see it in the allocations of the largest funds in the world, such as the one led by Larry FinckBlackrock, which even on its home page has a link to understand how they integrate ESG factors into their decisions.
This increased demand and increased support for these papers result in skyrocketing prices. That is why the third point is the potential return of positioning early. Those businesses that seek to be first will gain critical competitive advantages, which could lead to investment and growth opportunities. vForgetting the previous example, companies that, through their carbon sequestration programs, manage to capture more than what they emit will have interesting business opportunities. In short, we recommend that investors consider these factors when making their decisions, given that their relevance increases year after year.