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A CATHOLIC PERSPECTIVE: ESG AND THE INVESTMENT LANDSCAPE

By Tony Minopoli

I attended the Napa Institute’s Principled Entrepreneurship forum in New York City on October 11th, and it was an excellent conference. Having attended other of Tim Busch’s conferences, I was not surprised that this event was well done and very informative. There were numerous discussions on Environmental, Social, and Governance (ESG) and Diversity Equity and Inclusion (DEI) mandates that have peppered the investment landscape over the last decade. Initially, some of the ESG factors were admirable and dare I say ways to generate profit in the early years. However, ESG has taken on a much more political tenor and many look at it negatively. We believe, like any other investment factor, ESG needs to be evaluated in the context of the company and the true view of a company’s impact on the environment, society, and their governance strengths or weaknesses need to be understood.

When ESG first became a thing, we at Knights of Columbus Asset Advisors contemplated ESG in the following way, and I suppose as a good Catholic organization I will use a parable to make my point. Back in the dim and distant past, an unnamed conglomerate was hammered for dumping environmental waste into a watershed. If they had followed strong “E” principles, this could have been avoided. However, by dumping the waste in the river, collateral damage not only impacted humans and wildlife, but also shareholders. First, the company had to use resources to hire lawyers and ultimately pay fines and penalties. This is a direct leakage of profit that harmed the company and shareholders. Second, and potentially worse, management was distracted from executing their management plan because they needed to attend to litigation and government scrutiny.

Our focus in the past on ESG was to find companies that effectively handled their environmental waste, worked well with their shareholders, board, and regulators, and focused on their products and services to be good corporate citizens. Said differently, if management teams were not distracted because they worked effectively with internal and external stakeholders and followed regulations, they would be more effective in executing their management goals and this could be a positive determinant on their performance.

Unfortunately, like many good ideas, the ESG starting point bears little resemblance to where it has been taken. It is not in our practice to invest in something because it scores well on ESG factors, nor to avoid or sell something because it scores poorly on these same factors. We do, however, focus on understanding the ESG factors of a company to determine if it could make a given company a less attractive investment or could impair their access to capital. It feels like ESG may crumble under its’ own weight and many investment firms won’t use the term “ESG” anymore because it has become too pejorative. We will continue to focus on building portfolios that are compliant with Catholic teaching and use data inputs to help us evaluate the best building blocks for client portfolios.

I was inspired to write this after hearing the various discussions at the conference and hope it clarifies how we think about ESG.

This commentary has been prepared by Knights of Columbus Asset Advisors (“KoCAA”) for informational purposes. Nothing contained herein should be construed as (i) an offer to sell or solicitation of an offer to buy any security or (ii) a recommendation as to the advisability of investing in, purchasing or selling any security. Any opinions and information expressed herein reflect our judgment and are subject to change without notice. Certain of the statements contained herein are statements of future expectations and other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (1) general economic conditions, (2) performance of financial markets, (3) interest rate levels, (4) increasing levels of loan defaults, (5) changes in laws and regulations, and (6) changes in the policies of governments and/or regulatory authorities.

KoCAA is an SEC registered investment adviser that maintains a principal place of business in the State of Connecticut. For information about KoCAA’s business operations, please consult the Firm’s Form ADV disclosure documents, the most recent versions of which are available on the SEC’s Investment Adviser Public Disclosure website at adviserinfo.sec.gov. KoCAA is a wholly owned subsidiary of Knights of Columbus, one of the world’s largest Catholic Lay Organizations. Investing involves risk and you may gain or lose money on your investments. For additional information visit KoCAA.com or write to kofcfunds@kofcassetadvisors.org.