There are a lot of critical issues facing the world today, and different people want to make an impact in different ways. At Ethic, we help our clients align their investments with the environmental, social, and governance issues most important to them. So how do these personalized portfolios actually get made?
There are a lot of critical issues facing the world today, and different people want to make an impact in different ways. At Ethic, we help our clients align their investments with the environmental, social, and governance issues most important to them.
So how do these personalized portfolios actually get made? Unfortunately, it’s not as simple as sorting all the world’s public companies into a “sustainable” and an “unsustainable” group. First, we’ll dig into how Ethic thinks about sustainability, and then we’ll show how that thinking plays out in individual clients’ portfolios.
Our sustainability model looks at issues all across the environmental, social, and governance spectrum, and covers public companies (large and small) around the globe. So our first step is taking the many different issues facing the world and grouping them into themes. We cover 19 different broad topics that we call “sustainability pillars”: topics like Climate Change, Worker Treatment, Education, Women’s Rights, and Financial System Stability.
In each of these pillars, we seek to understand the different ways that companies can have negative and positive impacts. How can a company harm or help a particular group of people? How can a company improve or worsen some feature of the environment?
Companies can affect our lives and our environments in many different ways, including some that are immediately obvious. But we don’t just want to take cosmetic, surface-level factors into account and run the risk of greenwashing. We also want to look at indirect and systemic impacts, and to do so we conduct extensive reviews of the academic, peer-reviewed research literature in each of the different issue areas we cover to understand the possibilities for impact. Our research team evaluates studies according to strict methodological standards, favoring randomized controlled trials and well-designed longitudinal studies over observational research and case studies.
Once we establish the negative and positive impacts that can be achieved in each pillar, we can then lay out a model of the topic detailing how different company behaviors might add or detract. When we’re thinking about a pillar like Women’s Rights, for example, companies can directly affect the lives of their workers and their customers, and indirectly affect the lives of women in the general public. Some examples of questions we might ask of companies being evaluated for a Women’s Rights portfolio are included below:
- Impacts on workers: Do they hire and pay women in their workforce at equitable rates? Do they offer strong benefits, including parental leave and day care services? Have their leaders been implicated in recent controversies, like sexual harassment?
- Impacts on customers: Do they offer predatory loans—which historically have been disproportionately targeted at women? Do their products have safety issues that impact women in particular?
- Impacts on the public: Do they emit hazardous chemical waste that can interfere with pregnancy and birth? Do they sell firearms that can make domestic violence episodes more deadly?
We go to this level of detail, analyzing the direct and indirect effects of company behaviors, for each of our 19 pillars. What results is 19 different sets of criteria that each define, for a given issue area, the range of negative impacts companies can have in that area. We use these criteria for evaluating companies for clients’ portfolios. For example, if a client comes to us wanting a portfolio based on our Poverty pillar, we evaluate companies on about 40 different criteria to determine what companies will and won’t get flagged.
What companies get flagged for removal?
A crucial point for understanding our model is that we don’t choose what companies to screen out—our clients tell us what issues they’re most interested in, and we evaluate companies’ impacts on those issues. Some companies have negative impacts across so many pillars that they almost always end up flagged, while other companies hardly cross the threshold on any pillars.
But although we can identify some flaw or other in almost any company, we recognize the reality that companies can have positive impacts in some areas and negative impacts in others. No portfolio will consist solely of companies that are beyond reproach across all possible sustainability lenses, but some companies do much more or less good than others in particular issue areas, and identifying these outlying companies helps our clients achieve positive impacts even in an imperfect world.
Moreover, because not every kind of company behavior contributes to every sustainability pillar, companies can get flagged by some pillars and not flagged by others. For example, there are instances of technology companies being flagged in portfolios that prioritize our Corporate Ethics pillar (because of, e.g., data privacy and security issues or a history of anti-competitive practices), but these same companies are seldom flagged in portfolios that only prioritize our Clean Water pillar. This is simply because tech companies often don’t engage in much problematic behavior involving water quality or water access. Ethic’s criteria for including a particular company in a particular client’s portfolio don’t necessitate perfection across all sustainability issues. Instead, we seek to identify the most negatively and positively impactful companies in the issue areas the client has prioritized.
Our sustainability model offers a great degree of personalization. Our platform helps our clients seek impact in the areas they care about most—while also helping to provide education around issues they may wish to prioritize in the future. And we encourage our clients to use their holdings for engagement and shareholder advocacy: Ethic also supports proxy voting.
So, can we just draw a line in the sand separating “sustainable” companies from “unsustainable ones?” No. But if you tell us what you care about, we can likely show you what companies help or hinder your mission.
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