Full Transcript

Chris Stewart: He is Co-Chief Investment Officer and Managing Director at Veris Wealth Partners. Thank you for taking the time to be with us. Your group specializes in ESG investing. What’s an example of a company that is a good ESG investment?

Roraj Pradhananga: Before I offer an example, when we think about ESG investing, it is a set of factors you’re assessing to understand the product, services, and operations of the company. For example, if you look at Orsted, which is a renewable energy company that does large offshore and onshore wind projects, we (consider questions like) what is the product that the company is offering? Does it lead to a more sustainable future? And we also look at the operations of the company. How are they manufacturing these products? Are they looking at their energy efficiency? Are they looking at waste generation? Are they looking at recyclability and reusability? We look at all those factors.

On top of that, we also look at social and governance factors. So, for example looking at the governance structure, looking at shareholder rights, looking at board diversity, looking at board independence, et cetera, all make a difference in terms of how these companies are run because sustainable companies tend to be good actors and they not only care about generating returns — they also care about the communities they operate in and the planet as well.

Chris Stewart: Sustainability can be a divisive topic. In the business world, there are critics of ESG investing. Researchers at Columbia University found on average ESG funds pick firms with worse employee treatment and environmental practices.¹ The study also found that ESG funds charge higher management fees and obtain lower stock returns compared to non-ESG funds. When you read something like that, as someone who works in the industry, how do you respond?

Roraj Pradhananga: I think you need to bifurcate this in terms of the type of products that you’re investing in. Veris has been doing this since 2007. We look at the intentionality and authenticity of the investment products that we invest in. Getting an understanding of the rigor of ESG analysis and the types of companies that a fund, whether it’s a mutual fund or ETF, invest in is very critical. I think this is where greenwashing comes into play.

You must also look at active versus passive management. So, if you’re looking at passive management, and if a product, for example, is only using ESG scores and doesn’t really do an in-depth analysis of the operations of the companies, it might lead to some of those criticisms that we are seeing in the market. But there are also active products where a fund manager might do very in-depth analysis of the companies, but that also leads to certain impact on the risk return profile of that product because, in an actively managed product, you end up with exclusion — or rather lack of exposure — to certain industries or sectors. And that can have an impact on the risk return profile depending on the market cycle.

Chris Stewart: I think of the average person walking watching right now, they might have a financial planner. They might invest through a mutual fund. How can they have a conversation with their financial planner? To make sure the money, if they’re interested in this, to make sure the money is going to the right place.

Roraj Pradhananga: I think asking the financial planner what the investment thesis of the products they’re allocating your portfolio to is very important. Asking them to look at the holdings of those products is very important.

Ask about proxy voting. As equity owners, you have the right to vote proxies on various policies and agenda items in a company’s annual general meeting. I think ensuring that you understand the proxy voting track record around ESG guidelines is important.

And then finally, look at performance. Performance is important for sustainable investors. Ensuring that you not only have positive environmental and social impact, but also looking at the performance of the product is equally important.

Chris Stewart: Roraj Pradhananga from Veris Wealth Partners. Thank you for your insight. We appreciate it.

Note: This transcript was lightly edited for clarity and length. 

References

1. https://leading.business.columbia.edu/main-pillar-climate-change-sustainability/21st-century-finance/esg-mutual-fund.

Note: The author of the study cited by Chris Stewart, Columbia Business School Professor Shivaram Rajgopal, has gone on record noting that he believes “understanding environmental, social, and governance (ESG) issues is vital for business. (Source: What is ESG and Why Does it Matter). Professor Rajgopal’s remarks in that interview seem to support Roraj Pradhananga’s stated view that looking at the intentionality and authenticity of the investment products and rigor of ESG analysis is key in the practice of ESG investing.

Disclaimer

The information contained herein is provided for informational purposes only, represents only a summary of topics discussed, and should not be construed as the provision of personalized investment advice, or an offer to sell or the solicitation of any offer to buy any securities. Rather, the contents simply reflect the opinions and views of the speaker which may or may not come to pass.

Certain sample information, including references to specific issuers or companies, should not be construed as a recommendation of such issuer or company, and no inference should be drawn as to the performance of such company or whether it represents a good investment.