ESG - A Force for Good That We Rarely Use

Periodically an investor asks about the role that environmental issues, social issues, and corporate governance (ESG) plays in the Borna investment process. ESG evaluation programs rate most public companies by these metrics and many companies fund internal programs to improve them. The question leads to a discussion of how we factor ethics and values into financial analysis.

Borna’s top priority is to generate returns for our investors. It is a humbling moment when a family trusts you with their retirement or funding their child’s education. But there can be a conflict between seeking financial returns and ethical considerations. It is even more complicated as ESG measurement can be subjective, and the companies can game the evaluation system.

For Borna, the ethics discussion becomes a bit easier because all our portfolio companies help patients, making their lives better. Knowing that the companies are benefiting society is a rewarding aspect of healthcare investing.

I testified during Elliot Spitzer’s witch hunt of the investment banking industry and equity research. During an off-script rant I said, “I could be following ski resorts or casinos, which are much more fun to visit than attending a trade show and looking at pictures of gangrenous diabetic foot ulcers. These IPOed companies make real devices and every day, technologies financed through this process help people around the world. This includes people in your community and mine.” The attorney’s representing our firm, went apoplectic as I deviated from the ‘yes, no, I don’t remember’ script. Yet, ironically, this brought a climactic end to my participation in the inquiry.

The med-tech space excels on the social portion of the ESG scale. Even so, there are areas that I prefer to avoid. Primate testing bothers me as I have spent time working in zoos and came to see monkeys as having personalities. The business of recycled human body parts makes me uncomfortable. Marijuana related companies give me pause as our understanding of it is not complete. Studies have shown that teen marijuana use can measurably lower IQ and that it can be addicting to 30% of users. After ruling out these areas,  over 250 investable companies and $1.5 trillion in investable market capitalization remain, so these personal biases have a negligible effect on our opportunity set.

While we do not focus on ESG, the concept of measuring and monitoring it has been a force for good. It raises awareness of prominent issues in the business community around the world. ESG drives change and we recently discussed an example in a thought piece discussing the emergence of the female med-tech CEO. As Peter Drucker said, “What’s measured, improves.” And ESG is no exception.