Impact Investing

May 24th, 2015

This document expresses our philosophy concerning green investing. It is not intended as a summary of every facet of the problems involved in environmentally aware investment decision making. We do not think you can separate social responsibility from environmental responsibility. We hope not all of the ideas are unique, and we hope every reader recognizes and appreciates similar assertions. We do not think we can completely evaluate every company according to these ideals; it is a set of goals.

When we are satisfied a company is suitable environmentally, all the standard calculations of profitability, economic stability and proper diversity for an individual investor are reviewed. It must still make sense for the portfolio mix.

The ecosystems upon which we depend provide benefits of incalculable worth — including clean air and water, minerals, timber, oil, and fertile land. These natural resources are often available to companies at little cost. However, the extraction of these resources can threaten the viability of other environmental riches that may not be of immediate benefit to a company.

Companies that fail to treat these environmental riches with due respect, and that jeopardize the long-term viability of the gifts that our ecosystems provide, can cause great harm. We believe that companies will benefit not only the environment but themselves by increasing their potential efficiencies and reducing their potential liabilities. Companies need a checklist of operations:

  • acknowledge long-term sustainability challenges
  • maximize energy efficiency
  • use alternatives to fossil fuels
  • use recycled materials
  • reduce use of toxic chemicals in manufacturing
  • produce less solid and hazardous wastes
  • evaluate effects of business decisions on communities

Good stewardship of the environment translates readily to good corporate stewardship. Well run companies tend to perform better.

Topics

The following are the five major topics by which we assess the strength of corporations’ relationships with the ecosystems that support their activities:

  • Renewable and Alternative Energy Sources
  • Eco-Efficiency and Resource Conservation
  • Recycling, Safer Technologies, and Lifecycle Design
  • Pollution Control and Abatement
  • Long-Term Environmental Sustainability

While other issues are also important, these five are those which we believe can most meaningfully, consistently and accurately assess.

Renewable and Alternative Energy Sources

We believe the greatest and most difficult environmental challenge of our time is how to produce the energy needed for economic development without harming the environment. Burning fossil fuels is ultimately unsustainable because it produces the greenhouse gases chiefly responsible for global warming. Equally convenient and inexpensive alternative sources of energy are simply not available at this time. The future of our planet depends upon developing renewable, sustainable alternatives. Corporations have played a tremendous role in creating this problem and have the potential to play an equally large role in its solution. They have the resources to develop and market alternative clean-fuel technologies. We are particularly optimistic about wind, solar, and tidal power

Corporations have the capability to reduce their own carbon emissions. Companies can also play an important role in helping consumers increase their energy efficiency. We therefore look for companies that are aggressive about the energy efficiency of the products and services they provide.

In addition to the significant opportunities corporations have to be part of the solution to climate change, companies that fail to address these risks may face substantial financial risks of their own. There must be adequate preparation for the onset of a carbon-constrained world. We therefore seek corporations that are substantial users, producers, or developers of resources, products, and technology that reduce the risks of climate change and increase the use of sustainable alternatives to carbon-based fuels — and when possible we attempt to avoid many of the oil, coal, electric utility, and automobile companies whose products are contributing most heavily to climate change.

Eco-Efficiency and Resource Conservation

Efficiency, whether it is in energy or materials usage, is simply good business. Investments made in eco-efficiency bring some of the clearest and most immediate benefits to both financial and environmental bottom lines. It is sound financial management for companies to take obvious and simple steps toward efficiency in their use of energy and natural resources. We consequently view a company’s record in eco-efficiency and resource conservation as a key indicator of the quality of management.

Recycling, Safer Technologies, and Lifecycle Design

We think there is a need to incorporate recycling and reprocessing into the lifecycle of product design. Start with the selection of environmentally benign materials, go through minimization of the environmental effects of product packaging and use, and end with product take back and recycling; lifecycle design lightens the environmental footprint left by consumers. Although balancing costs with benefits is often a challenge in such investments, we believe that the long-term benefits of such decisions generally outweigh short-term costs.

We therefore seek out companies that make major use of recycled materials in their manufacturing processes, that are working to solve the challenges of product take back and recycling, that have found nontoxic substitutes for toxic chemicals used in manufacturing processes, and that are in other ways willing to invest in making their products and services compatible with the ecosystems they affect. We believe that these companies provide substantial long-term benefits to ecosystems, as well as to their employees and customers.

Pollution Control and Abatement

A company’s minimum obligation to its communities and the natural environment is to assure that no substantial harm is done by its current operations. Industrial firms must clean waste water before it is discharged and capture volatile organic compounds before they escape into the atmosphere. For electric utilities, this means installing scrubbers to end the release of particulates and sulfur dioxides. For chemical companies and refineries, this means stopping spills and leaks, and disposing of hazardous wastes appropriately. These basic steps help avoid immediate harm; an ounce of prevention is worth a pound of cure. We recognize that pollution avoidance can require expensive capital expenditures. We believe, however, that these investments can often pay long-term returns to communities, neighbors, and companies themselves that more than compensate for their short-run costs. We therefore favor companies that have a record of handling today’s pollution challenges effectively and without regulatory controversy, while developing more sustainable practices for tomorrow.

Long-Term Environmental Sustainability

Despite the tremendous progress toward increased awareness of the need for compatibility and partnership between society and ecosystems, a surprising number of corporations still deny or ignore the need to manage their long-term environmental risks appropriately. It is of substantial concern to me when companies lag behind on fundamental matters of long-term environmental sustainability.

On the positive side, a handful of companies have had the foresight to think systematically about their environmental footprint and to pioneer long-term sustainability models for their industries. We recognize these initiatives as having the paradigm-shifting implications necessary to achieve true long-term environmental stability.