For investors looking to gain traction through both financial and social impact, the challenge of positive screening is ensuring that one is not lost in favor of the other. Portfolio strength is developed on themes, opportunities in the marketplace, and underlying quality, and it is (and always has been) critical to have a full understanding of the composition of and rationale behind each investment. Such due diligence requires investigating elements such as:
• Disruption opportunities. Economies are made up of shifting plates of industry, and those who identify undervalued areas poised for significant momentum – and individual companies that are positioned to benefit – will see enduring upside that thrives when the general investing population weakens.
• Quality of Demand. Stability and sustainability of demand are critical factors that drive opportunities. Investors must also understand the value of functional demand as it relates to supply. In the last decade, for example, the demand for commodities as investment products brought many outside buyers into the commodities markets, driving prices well above the rational price suggested by the functional supply and demand fundamentals in the global economy. This mispricing left investors vulnerable.
• Debt/asset ratios. A low debt/asset ratio is a fundamental sign of a strong balance sheet, and in a deleveraging environment it is a critical component to sustainability. There is a true competitive advantage to having actual liquidity at hand; it provides management with the flexibility to keep their options open, to pursue opportunities that may benefit shareholders, and to grow market share when overleveraged competitors are weakened by a lack of accessible capital.
•Dividend growth. Management that gives back to its investors with consistent increases in dividend returns demonstrates a long-term commitment to the enterprise, and invites shareholders to remain dedicated.
•Social positioning. Companies that lead with ethical business practice set a standard that captures competitive advantage. Fair treatment of employees, the environment, suppliers, customers, and shareholders is rewarded by the market and influences vendors and partners. Just as important, those that provide solutions to environmental or social concerns are tying their business to market needs that have the potential to spike as the global picture changes.
Socially responsible investors must also acknowledge that trends are long-term, and the right strategy can lead to strong returns over time. This opens the door for the benefits of compounding returns, further amplifying results.
SRI has for decades remained on the fringe of strategic money management, routinely battling the perception that prioritizing an ethical or social focus requires sacrificing significant returns. Market conditions, however, now highlight the correlation between company performance, integrity and transparency – an interdependence that makes smart SRI nearly indistinguishable from smart mainstream investing.
While 40 years ago, the nascent industry was content to label investments in black and white via negative screening, the current environment makes clear that SRI is a complex web of research and individual preferences. Global issues such as corporate fraud, opacity in the financial sector and delays in addressing climate change spotlight the importance of sound, forward-looking business practices. Simply put, good management with a moral compass and a long-term view reduces investor liability – and in our ever-progressing world, opportunities abound to grow capital while promoting positive social change.
This article was written by Chat Reynders, Chairman and CEO of Reynders, McVeigh Capital Management and Co-Portfolio Manager of AdvisorShares Global Echo ETF (NYSE Arca: GIVE).