Are there good companies?

Mark Bateman - February 18, 2018

When investors are first exposed to the concept of “socially responsible investing” (SRI)—or Bilblically Responsible (BRI), or ethical, or sustainability investing—they often summarize their strategy as investing in “good” companies or avoiding “bad” companies.   But is there really such a thing as a “good” or “bad” company?

Coming from the research side of the ESG (environment, social governance) industry, I’ve often said, “Name a company and give me 10 minutes, and I’ll find something bad about that company.”  No company is perfect.

This is why I frequently talk about ratings that are standards-based versus ratings that are comparison-based.  As an example, a standards-based rating might say that to pass, a company must have half of its board seats filled by women.  This is a binary rating.  A company either passes, or it doesn’t.  A comparison-based rating would rank companies based on the relative percentages of women serving on their boards.

Statements of “good” and “bad” are statements that imply standards.  They are binary; a company either is or isn’t.

Statements of “best” or “worst”  (and “better” or “worse”) are comparative.  They offer a continuum; any two companies can be ranked using these concepts.  And significantly, both companies could be “good” compared to a standard, or “bad” compared to a standard, and one would still be “better” than the other.

But that’s only half the equation.  You also have to decide what issues you care about.  Your list of significant issues may be very different than your neighbor’s.  She could think that climate change is an existential threat to all life on earth and we have to address that before anything else matters.  You might think that income inequality is the most important issue because it affects people today, not 50 years from now.

Each of you is right, because your issues are the most important for you, and you should be able to invest in a way that is consistent with your values.  But it does mean that the evaluation of companies, and therefore of mutual funds or ETFs, will be different for each of you.

When you’re talking with your clients, it’s important to know whether they have absolute thresholds—are there standards that should not be broken?  Alternatively, your clients may be looking for the best available option with the closest match to their preferences.

Both are possible approaches, but it’s a conversation you should have with your client.