Sustainable Investing
Sustainable investing means the full integration of environmental, social and governance (ESG) factors into investment analysis and decision making. In our view, the combination of rigorous financial analysis and equally rigorous ESG analysis provides an extra level of scrutiny that helps us identify better long-term investments.
It is also our view that sustainability is the best foundation for efficient markets, vibrant economies, and durable communities and societies. Sustainable development was probably best defined by the Brundtland Commission (or the World Commission on Environment and Development of the UN), which described it as economic activity that “meets the needs of the present without compromising the ability of future generations to meet their own needs.”1 The idea that future generations should have undiminished capacity to serve their own needs requires economic theory to consider the long term, just as sustainable investing focuses on indicators of long-term financial value. Sustainable investing, like sustainable development, is based on the idea that the creation of durable value should be the central focus of finance and economics.
For Pax World to consider investing in a security, it must meet our standards in several areas: financial performance, environmental management, social impact and management, and corporate governance. In other words, we integrate traditional financial analysis with what we call “ESG,” or sustainability analysis. This second layer of analysis gives us added insight into the quality of a firm’s management and culture, risk, innovation and other factors influencing a company’s long-term financial prospects. In other words, ESG analysis gives us another angle from which to assess the same core elements of value that we look for in financial analysis. Good management should be visible no matter what viewing angle one chooses and well-managed companies offer investors the best opportunity to add value to their portfolios over the long term.
There is a great deal of support, both in theory and in practice, for the integration of sustainability factors into investment analysis and decision making. A recent report by Goldman Sachs, for instance, states, “The market is willing to pay a premium for sustainable competitive advantage as expressed by superior returns.”2 Sustainable competitive advantage, in turn, is built on a foundation of sound management of ESG factors. A 2004 study examined 52 individual research studies comprising over 33,800 individual observations and concluded that corporate “virtue” — social and environmental responsibility—is positively correlated with corporate financial performance.3 Other studies have found similar correlations between various measures of ESG performance and financial performance.
Download Pax World’s Sustainable Investing Overview brochure.
1United Nations, 1987, “Report of the World Commission on Environment and Development,” General Assembly Resolution 42/187, 11 December 1987.
2The Goldman Sachs Group, “Introducing GS Sustain,” July 2007.
3Marc Otlitzky, Frank L. Schmidt, and Sara L. Rynes, “Corporate Social and Financial Performance: A Meta-Analysis,” Organizational Studies 24(3): 403-441, 2003.