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Aligning Your Values & Investments; Curran's Sustainable Equity Portfolio

Curran has made the commitment to study, evaluate and manage sustainable equities, aligning our investor’s investments with their values.   There is increasing demand from clients to assure that their equity investments reflect their values.  Like anything we do at our firm, we put an emphasis on due diligence and education.  I personally started by returning to my alma mater, NYU Stern School of Business, where I earned my MBA to take an intensive executive education course on sustainable investing.  Following the course, we came to the conclusion that investors could in fact, invest in a portfolio of sustainable companies, over a long-time horizon without sacrificing a competitive total return. 

After reaching this conclusion we chose to invest in a sustainable, investment data service provider Arabesque, a global company headquartered in London.  Utilizing this data Curran’s investment committee is able to analyze and evaluate companies for their sustainability.  It supplements the fundamental research that we conduct internally.  As a result, we are pleased to now offer our clients Curran’s Sustainable Equity portfolio strategy.  We start the process with our universe of over 3,000 investable publicly traded companies.  Applying the same rigorous fundamental research process, we then evaluate companies for their sustainability. 

A company must pass a series of additional criteria for consideration as an investment in our sustainable equity portfolio.  We start by examining a company’s industry exposure.  The investment committee performs a check to see if a company operates in industries or utilizes any of the following; Adult Entertainment, Alcohol, Defense, Fossil Fuel, Gambling, GMO, Nuclear, Pork, Stem Cells, Tobacco and Weapons such as rifles and hand guns.  We do not necessarily place a blanket restriction on these industries but we generally avoid them.  However, we can place a restriction on specific industries at a client’s request. 

I will provide a couple of examples why we do not necessarily place a blanket restriction on companies with exposure to these industries.  For instance, take one of our top holdings Accenture, Plc, a global consulting services firm.  It happens to rank very highly for sustainability.  However, it has clients in the defense industry and works closely with the United Kingdom’s defense department.  We have made the decision to maintain our investment because Accenture is not directly involved in the manufacturing of defense and military weapons of war.  One could make a case that Accenture is in fact complicit but it then in our view becomes a slippery slope.  Would one divest from Microsoft ownership because defense companies buy its software? Taking factors such as that into consideration hopefully provides clarity into our thought process and evaluation. 

Another example to consider is our position in Next Era Energy.  By revenue Next Era is the largest alternative energy company operating in the United States.  Its alternative energy business also happens to be its fastest growing business segment.  Should we opt not to invest in the company because of its legacy gas utility business? Our investment committee made the decision to buy shares knowing the exposure to all of Next Era’s business operations.  We have the information, made our evaluation and elected to buy Next Era shares.  Investors have the opportunity to work with us, electing to restrict companies with direct industry exposure to fossil fuels.  It is our role though to point out that it can come at a cost.  An investor restricting ownership of any company with exposure to the fossil fuel industry misses out on an opportunity to own one of the fastest growing alternative energy businesses in the marketplace today.      

The investment committee also applies ESG (environmental, social and governance) criteria which is integrated into the investment selection process.  Some of the environmental factors considered are emissions, resource usage and waste.  Examples of social factors evaluated are employee satisfaction, compensation and employee training and development.  A few examples of governance factors are capital structure, transparency, earnings quality and accounting conservatism.     

Utilizing the sustainability criteria, we have constructed a portfolio of companies that score very well for ESG and much better than the market as measured by the S&P 500.  Curran’s Sustainable Equity ranks higher for each of the ESG factors; environmental, social and governance than the S&P 500.  Breaking it down further where does the portfolio rank highest for the factors that contribute to the E – S – G scores? Environment, the data shows that companies in the sustainable equity portfolio rank well for (low) emissions.  We can state that the companies in the portfolio emit less greenhouse gases through their business activities than the average emissions of a company in the S&P 500.  In addition, the companies in our sustainable equity strategy rank highly for their environmental stewardship which we define as their impact on biodiversity and animal welfare.

Currently the Sustainable Equity strategy ranks strongest for its social criteria.  Let’s detail a few of the factors that standout among the companies in the portfolio.  The companies in our strategy rank very highly for employment quality and satisfaction.  The employees at the companies we own report quality working conditions and high levels of work satisfaction.  Given that, it’s probably not all that surprising the companies in our sustainable portfolio rank highly for employee training and development.  We invest in companies that are providing opportunities and programs to enable and support learning for employees.  The portfolio companies also rank very high for their community relations.  The companies rank highly in surveys of public trust and are also active in the communities they are based. 

The third factor is corporate governance.  This tries to measure how well a company is governed and its procedures and mechanisms to ensure proper long-term corporate management.  Given our investment philosophy, investing in the highest quality companies, it should not come as much of a surprise that Curran’s Sustainable Equity strategy ranks highly for governance and in particular capital structure.  We invest in companies with little debt and strong balance sheets.  Studies have shown that companies with large amounts of leverage suffer from short termism.  Large amounts of leverage can adversely impact long-term strategic decision making.  The companies owned in the strategy also rank highly for business ethics as it relates to issues such as corruption and anti-trust issues.

The Investment Committee takes this data into consideration as part of the stock selection process but must think critically evaluating further the data’s results.  Take for instance Tesla a top Sustainable Equity holding in our portfolio.  It may surprise many of you that Tesla does not rate very well among many sustainable equity analysts and ESG (environmental, social and governance) data analyst providers.  In fact, it scores the lowest of the companies in the portfolio.  Many are critical of Tesla’s governance, Elon Musk’s role.  In addition, electric vehicle batteries require lithium which tends to be sourced from mines in the developing world with poor quality labor conditions which creates concerns about electric vehicle manufacturers’ supply chains.  Our investment committee has reached a different conclusion.  Tesla has been the leader in electric vehicles and forced the automotive industry to belatedly adapt and now attempt to catch up.  All while Tesla has built an impressive first mover advantage and its our assessment that it is in fact a very well-run company as measured by our fundamental analysis.  Tesla is a great example illustrating how our Investment Committee looks beyond simply accepting high ESG scores.

For investors looking to align their values with their investments, we have put the work into create an equity strategy to satisfy your objectives without sacrificing total return.  Whether it turns out to be your core portfolio or a diversifying strategy, our Sustainable Equity should be considered.  We encourage our clients to speak with your wealth manager, Tom or me to see if Sustainable Equity is something that you want to consider for your investment portfolio.  I look forward to speaking with you in the new year!