Sustainability at Orchid
At Orchid we are committed to doing the right thing, for our members, our readers and our planet. We promote sustainability among our members and push forward the implementation of ESG factors in our work. ESG is at the heart of our investment process and each company we analyse must comply with a set of guidelines, our ESG Global Equities Fund is a testament to Orchid’s commitment to Sustainability.
What is ESG?
Environmental, Social and Governance (ESG) criteria are used by investors to pick out companies that agree with their own values. This is a crucial part of socially responsible investing, an industry that has grown significantly over the last 5 years. The use of ESG varies from person to person, with some using it as a way to avoid companies whilst others use it to target specific companies they want to invest in. These criteria have become increasingly popular with younger investors as millennials are more likely to be concerned about environmental issues and equality than their predecessors. As a result, there are now over $11.6tn in assets that have been purchased according to ESG criteria with many wealth managers and funds offering exclusively ESG compliant products. This change has also been reflected in the entire financial world, with every major bank now producing a sustainability report every year.
Why is it important?
The size of the ESG industry makes it an extremely powerful way through which many global issues can be tackled. The private sector is arguably a greater force in most countries than the government and many issues relating to climate change, poverty and equality have been brought about by these companies. Furthermore, many governments and international organisations have not been effective in doing enough to solve these problems as they are held back by bureaucracy and politics. This makes the private sector a great medium through which we can achieve the target of sustainable development and ESG criteria makes sure that as investors and analysts we can allocate our capital to assets which will not only generate a return but be socially responsible at the same time.
Orchid’s ESG Guidelines
Below are some of the main issues that are often brought up when evaluating the ESG impact of any asset. There are obviously many other factors that can be considered and one of the benefits of analysis that takes into account ESG is that it can be tailored to the values of the investor. This also provides the opportunity to have analyse a company in more depth than just its financials, as ESG criteria often look at market strategy, business principles, CSR, politics, macroeconomics, law etc. This can often make analysis much more interesting and develop greater knowledge of an industry or asset class with regards to its geopolitics.
Energy Usage – This looks at whether the company uses renewable energy or other forms of clean technology either to make their product, power their offices or ship their goods. It can also involve looking at how energy efficient the company is and what steps they are taking to mitigate the effects or reduce their energy usage. The use of water can also come under this as firms that use large quantities of water that comes from unsustainable sources often have a negative impact on the environment.
Emissions – The carbon footprint of a company is extremely important is not just limited to their factories. Considering the impact of their whole supply chain including distance travelled and the production methods used in each instance can give a good idea of whether a company is emitting sustainably. This can also be used to consider emissions of CFCs and sulphates and nitrates. This can be really useful in analysing the impact on climate change that a company has
Waste Management – This considers a company’s policies on disposing waste and their transparency of the process. It can be seen as positive if firms adopt circular economy policies and try and make their products as reusable as possible, out of materials that are sustainable and can be easily recycled. On the contrary, a company that uses landfills to dispose of its waste or creates toxic environments through not getting rid of hazardous waste responsibly is less desirable.
Biodiversity – This looks at the impact on local flora and fauna as a result of a firm’s production process. For example, many firms could use palm oil in their products which comes from unsustainable sources, using slash and burn techniques which have made many local species that live in the rainforest endangered. There are many other examples of these negative effects. Looking at how a company treats, and sources animals is also a key factor under this.
Labour – This involves looking at a company’s labour standards across their supply chain and includes factors such as the health and safety of workers. Socially responsible companies often tend not to use child labour or exploit workers in poor countries and will pay their workers a decent living wage. It is also important to consider whether firms use zero-hour contracts or have a history of human rights violations when coming to their workforce, as investing in them could make the problem of exploitation even worse.
Communities – This contains many different factors relating to the relationships between a company and the people they impact. In developing countries many large corporations destroy communities through making them move home or contaminating their land as a result of their activities. As a result, they often have only negative effects on the local societies in which they operate. Many companies nowadays are trying to rebuild relationships and help communities through reinvesting profits and running schemes to help reduce poverty, which can be extremely effective if managed honestly and correctly.
Diversity – A company’s inclusion policy is extremely important with regards to ethnic minorities and gender equality. It could be useful to look at ratios of men to women or number of ethnic minorities in leadership positions, as well as pay gaps. Transparency with regards to this as well as any initiatives to fix the problem often signal that a business is progressive and fair
Executive compensation – Most public companies are required to disclose executive compensation, and this is in place to curb extremely high salaries that people say can disrupt the long term interests of the shareholders in the company. This could lead to company that is unstable in the future and is often perceived as more risky
Board Independence – The ability of the board to vote freely and represent shareholders as well as other interests, independent of the CEO is extremely important in maintaining a fair company. Another factor which influences this is whether the CEO is separate from the chairman of the company.
Shareholder Rights – Shareholder’s should have voting rights on major issues at the company since they have acquired a stake and a firm that does not really pay enough dividends to shareholders or act in their interests is often seen to be vulnerable and acting unfairly.
Tax Strategy – A company’s tax structure can be assessed on both moral and financial grounds. Tax avoidance and using lots of loopholes is common in the business world, but responsible companies should try and contribute to their society as much as possible through tax. The tax structure can also be unsustainable, and this could be an interesting way to approach the topic.