Love, so the saying goes, is a battlefield. In a crowded market, every romantic hopeful must put their best foot forward, polishing up their dating profile to highlight their strengths and camouflage their flaws, hoping if they put out enough green flags the red won’t be quite as noticeable.
Just like those daters trying to sort the catches from the catfish on a dating site, sustainable investors are increasingly faced with a similar challenge, grappling on a daily basis with companies touting ‘eco-charmer’ in their bio while omitting a history of business ethics controversies, poor labour management and the ever-present spectre of a past love lingering on the sidelines in the form of a non-independent chair.
Can’t spot the red flags for the green?
Just like the pursuit of Mr Right, assessing an investment’s sustainability profile requires an impartial eye. When encouraged by glowing pictures of success and earnest declarations of commitment it can be easy to miss, or tempting to ignore, early red flags.
Easy as it can be to be ‘love bombed’ into a false sense of security, it is important that investors consider the full spectrum of risks to which a company is exposed before jumping in with both feet.
Let’s take Tesla as an example. Considered to be significantly ahead of peers in terms of fleet fuel consumption and product environmental impact, the company is a common holding across a number of prominent sustainability-focused portfolios.
Dig a little deeper, however, and the company continues to face significant controversies surrounding its alleged failures to prevent air pollution and environmental impacts in the lithium supply chain.
Furthermore, the company’s alleged involvement in prominent social controversies in recent years raises concerns around the management of social issues, particularly relating to labour violations, data privacy, and health & safety.
In combination with concerns around the company’s corporate governance, these controversies should throw up significant red flags to current and potential shareholders.
Feel like they never put you first?
Mutual respect and accountability are the foundation of all good relationships, fostering a partnership in which opinions can be voiced and valued in return.
Companies adopting a multi-class share structure, whereby one class of shareholders carries fewer voting rights despite bearing more of the economic risk, deviates from those foundations.
In recent years there has been a growing number of shareholder proposals focused on the adoption of equal voting rights. In some cases, when removing the impact of these structures on voting outcomes, these proposals have received between 60%-90% support from common shareholders year after year, but to no avail.
In the absence of protective mechanisms such as sunset clauses, these structures create disparities between investors and companies, resembling the signs of an unhealthy power imbalance in a relationship.
Alphabet, for example, is a company making real advancements in sustainable solutions and taking significant steps to drive up standards across its supply chain.
When the company went public in 2004, the founders shared in a letter that their multi-share class structure would enable them to pursue their long-term vision for the company without short-term pressure and ensure they could prioritise opportunities in the best interests of long-term shareholders over short-term results.
Yet over time, and in contrast to this commitment, Alphabet’s notable failures to implement proposals with majority support from unaffiliated voters has left many feeling overlooked and undervalued.
Open to change, or just too much baggage?
Like every potential love interest, all prospective investments come with some kind of ‘baggage’. While on a corporate level this is more likely to present as historical risk mismanagement than a hidden tendresse for an ex-lover, transparency, accountability and openness to change are key to building strong and productive partnerships.
A business that has clearly learnt from its past mistakes and demonstrated transparency as to how it has dealt, or is dealing, with these issues can form the foundations of a strong approach going forward.
In contrast, a company that seeks to hide past controversies by covering up red flags with token gestures or glossy reporting, paves the way for a litany of reputational damages, creating deep-rooted trust issues in its investors.
In the former camp, Apple is a prominent example of a company that previously lagged peers in terms of managing its supply chain oversight and the social impact of its products.
While product lifecycle impacts remain a risk for the company, in recent years it has taken significant steps to manage these risks, strengthening its relationships with suppliers and reducing its impact across a number of key areas, clearly demonstrating a willingness to improve its approach to managing key sustainability risks.
In the latter, companies such as Amazon and Meta have shown slower progress and increased involvement in controversies, behaviours strongly indicative of weaker management of key risk areas.
A long-term thing, or time to call it quits?
At the end of the day, it is important to remember that any genuinely thorough sustainability assessment will inevitably throw up some kind of sustainable risk exposure.
At this point, it is for the investor to seek a genuine understanding of the risks, how those risks are considered and managed by the business, and whether the company is learning and changing from past mistakes.
This Valentine’s Day, it might be time to ask yourself some important questions: Is the company you’ve invested in a genuine, long-term catch? Are they aware of their faults, and committing time and effort to working on them? Or are you being ‘breadcrumbed’ with short-term commitments and empty promises? Are they willing to change, but just not for you?
If it’s the latter, it might be time for ‘the talk’.
Hayley Grafton is a senior responsible investment analyst at EdenTree Investment Management. The views expressed above should not be taken as investment advice.