Values-Based Investing & Financial Performance

It is possible to invest with your conscience AND still generate competitive returns in your investment portfolio

Portola Creek is amongst an increasing number of institutional investors integrating ESG criteria into their investment strategies. But here’s the challenge: Simply excluding every objectionable sector or choosing only high ESG scorers reduces the universe of investable stocks by half. So how do we implement ESG principles without sacrificing diversification or abandoning efforts to improve corporate conduct?

"Our identification of a company’s declining Governance score over time has been an effective sell signal before a significant event occurs."

The Importance Of ESG

Environment + Social + Governance

The importance of ESG - Environment + Social + Governance. Portola creek portfolios sit at the intersection of Values and Performance. Assess management quality and limit surprises and event risks. This includes accidents, shutdowns, fraud, and strikes. Understand exposure to long-term systematic risk factors. This includes weather patterns, water scarcity, data security, and skill shortage. Align with values, enhance long-term risk/return.

Relative Performance

Relative Performance - ACWI index compared to the ACWI ESG Universal Index. Backtested simulation from Nov 30 to June 30

We accomplish this in three ways. First, we compare a stock’s ESG rating to other companies in their respective sector. It would not be especially useful to compare an energy company’s ESG score to that of a technology company for example. Secondly, monitoring the momentum of a company’s ESG score helps us identify early signs of a business that is improving (or faltering). Finally, casting shareholder votes on important environmental, social, and governance matters allow our voices to be heard by management, ultimately effecting change for the good.

Examining ESG factors allows us to understand a company’s non-financial risk. Although traditional investment analysis does not take into account non-financial risk, we believe doing so can provide insight into a company’s financial performance. Interestingly, the G in Governance shows the highest correlation with financial performance. This should be of no surprise since effective corporate governance is vital to a company’s performance when viewed from a long-term perspective. When a company has a declining G over several quarters in a row, we see that as a big red flag.

As the demand for VBI increases around the world, Portola Creek is uniquely positioned to help investors align their portfolio with their personal values AND generate returns in their portfolio.

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