I’ve been thinking a lot about Costa Rica and Iceland these days — and not because of the stark contrast in their climates. These two countries, which are literally almost polar opposites, actually have a common tie within the investing world: They both showcase examples of what are called Environmental, Social and Governance (ESG) factors at work.
Costa Rica’s Success Story
It’s hard to believe today, but this beautiful, rainforest-covered wonderland wasn’t always this lush. Between the 1940s and 1980s, settlers came into Costa Rica and initiated large-scale clear-cutting operations. A country that was once 70% mostly forest-covered eventually was stripped almost bare.
Fortunately, the Costa Rican government eventually enacted strict deforestation guidelines. Rainforests are now back to covering 52% of the country and still increasing. The country’s agricultural industry is doing well and the improving climate is attracting more tourism, which is the country’s number-one industry. In addition, the country plans to be fully carbon-neutral by 2020, which means the country’s tree cover will fully absorb any carbon dioxide emitted by manufacturing.
Costa Rica’s strategic decisions have made a huge, positive impact on the environment (the “E” in ESG investing). At the same time, those choices are helping their economy flourish.
Iceland’s Feminine Victory
Iceland’s story is related to diversity and positive governance, the “G” in ESG investing. Diverse and positive governance can mean a number of things, including appointing diverse board members (different ages, gender, race, educational qualifications and professional backgrounds) and ensuring reasonable executive compensation, and more.
In Iceland, the issue was gender diversity in leadership positions. Did you know that in 2008, Iceland’s three main banks all collapsed? Only the Icelandic bank survived: Audur Capital. Its significant difference: It was owned by women.
Most people in Iceland (including the guys) blamed men for their economic crisis, since men dominated bank leadership positions and the country’s government at the time. A Financial Times article quoted Icelandic banking officials as saying that the banking crisis was caused by young, mostly male bankers who promoted a bonus-driven, risk-taking culture. Several scholarly studies have demonstrated that women are significantly more risk averse than men.
In the aftermath of Iceland’s financial meltdown, a woman prime minister took over the country and filled her cabinet with mostly women. Male CEOs were ousted from Iceland’s banks and replaced primarily by women. More diverse governance helped turn things around for Iceland’s government and companies.
ESG: Doing Well While Doing Good
Costa Rica and Iceland are strong examples of ESG factors and their connection to investing. Companies (and entire countries) that incorporate ESG principles into their corporate strategies show us that sustainable investing works. ESG isn’t just about “feeling good” about what a company does. Corporations that utilize ESG factors in their work also can do extremely well financially while they do good for the world.
On a practical level, companies with a strong ESG emphasis reduce their financial and social risks and increase trust among employees and shareholders. The result: These factors can positively impact companies’ stability and share prices over time.
Inclusionary vs. Exclusionary Investing
So what’s “new” about ESG investing? In past years, you may have heard about a similar investing approach, known as socially responsible investing (SRI). SRI basically takes an exclusionary approach. The goal is to weed out companies from your portfolio if they engage in practices that somehow damage society or the environment.
ESG, on the other hand, takes an inclusionary investing approach. Instead of trying to ferret out the “bad guys,” investment managers proactively look for companies that are doing positive things on the environmental, social or governance fronts. A number of databases now exist to help investment managers determine various companies’ ESG “scores.”
I see ESG as a new way to use investing decisions to more fully align yourself with your social values. I don’t worry about ESG factors being a drag on an investment strategy. ESG is simply another way to help investors choose companies that are making choices about their future and our future. You and I can help effect change in the world by carefully choosing where we invest our money.
Let’s Talk About Environmental, Social and Governance (ESG)
Are you interested in learning more about Environmental, Social and Governance – ESG? I’m actively looking for folks who would like to discuss the value of this investing approach. At RegentAtlantic, we’re strongly considering adding an ESG portfolio within the coming year. This portfolio would be a good fit for our firm, and a natural extension of our commitment to giving back to our communities through our Neighborhood Nonprofits Group (NNP).
However, I’d like to introduce this option with some helpful feedback from you.
If you’d like to talk more about ESG, call me directly at (973) 425-8420, ext. 207, or email me: email@example.com.
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