At Etho Capital, we believe investment strategies that incorporate Environmental, Social and Governance (ESG) sustainability in smart, skilled ways will be more competitive and produce better returns over time. To prove that thesis, we developed our Smart Sustainability Process. An in-depth look at the rationale behind it is presented below.
involves climate efficiency
Our Smart Sustainability Process starts by calculating over 5,000 individual companies' climate efficiency. We first divide each company's total (Scopes 1-3) carbon emissions by its total value (market capitalization) to deduce its carbon intensity per dollar invested (CO2e/$). Climate efficiency is then determined by dividing each company's respective carbon intensity by the average carbon intensity for that company’s particular industry sector.
Once a company's climate efficiency is known, we can identify and compare “Climate Leaders” with “Climate Laggards” per each industry sector. The chart below includes several years of financial performance, using a 2014 data set of over 5,000 publicly-traded companies, and shows Climate Leaders outperformed Climate Laggards across most sectors and over most time periods.
Climate efficiency and
Financial Returns optimized
Assuming climate efficiency and financial performance are linked, then an optimum climate efficiency level should exist for maximizing risk-adjusted returns. Using the same 2014 data set, we found that in most cases when climate efficiency rises the overall risk-return profile improves. Please, use the interactive chart below to find the optimum level of climate efficiency and financial performance.
Investors concerned about ESG sustainability typically want their investments to better reflect their ideals. We at Etho Capital see another reason to consider ESG sustainability: Performance. Our Smart Sustainability Process uses both quantitative and qualitative screening methods to further refine our portfolios by removing unsustainable companies and industries (like coal/oil/natural gas, tobacco, weapons, gambling, etc.). Please, use the following chart to see how results improve.
conclusion: Smart sustainability works
To date, conventional wisdom has assumed that ESG-focused investing compromises financial performance. At Etho Capital, we are seeing and proving quite the opposite. Our analysis of thousands of companies across all industries suggests that climate efficiency is positively correlated with financial performance, and that avoiding unsustainable companies can further enhance returns. When such findings are skillfully implemented as part of a sound and methodical portfolio-construction process, the results become even more compelling. Simply put, our Smart Sustainability Process works.