The Socially Responsible (ESG) Portfolio

Introducing The Moby Environmental, Social, and Governance Portfolio:

Most investors would agree:

Making money shouldn’t mean having to compromise your principles.

But is that really a high enough standard? Isn’t there a way of investing that not only avoids compromising, but lives up to your principles?

Meet ESG.

With the ESG Strategy, you can invest in a way that reflects your values. In a way that considers the impacts of the companies you invest in.

In the way your dollars shape the world.

Want to know what ESG is, and how you can incorporate it into your life? Want to start investing in a way that doesn’t make you feel icky?

Keep reading to learn more about this strategy…

Understanding ESG:

Over the last decade, investors have gotten more discerning.

It’s not enough to make cold, hard cash. Investors now want to know that their money is going towards companies that are contributing to the world as a whole.

More and more, investors are becoming more socially responsible with their dollars. They’re looking to put their money into companies that reflect their personal values.

Enter the ESG score. ESG stands for Environmental, Social, and Governance.

Together, these three variables quantify the risk of a company by looking at its exposure to risks in each of these categories.

From context clues, you probably know what ESG means. But let’s get specific.

Environmental relates to a company’s negative environmental impact, such as carbon emissions and other forms of pollution, but it also rewards companies for adopting greener technology.

Social relates to how committed a company is to social causes, like inclusion and the elimination of workplace discrimination.

Governance relates to the company’s corporate culture, executive pay, and corruption.

Unfortunately, the math can get a little fuzzy.

Unlike financial ratios, calculating “social risks” isn’t always straightforward math.

But there are ways to assess each company’s risks. For example, let’s say the U.S. outlawed the production of Chemical XYZ, determining it to be harmful to the environment.

Then, say a company made a large investment in Chemical XYZ.

Is it really too difficult to say that poses an environmental risk? No. That’s how ESG can assess a higher likelihood of social and environmental risks becoming social and environmental realities.

Combining Risk Scores

Once we combine these scores, we create a composite ESG score. This score compares a company against its peers in the category.

Why only compare a company against its peers?

Well, put it this way: it’s not exactly fair to compare an oil company to a cleaning software company.

On the whole, we weigh ESG scores and strategies by identifying companies that show diligence in managing their exposure to these risks.

In other words, ESG helps us look for the companies doing good work, minimizing risks, and remaining compliant with modern standards.

Example: Master Card (MA)

Let’s dig into how it works. For our example, we’ll look at our ESG ratings for Master Card Incorporate, MA, our top holding in the ESG strategy.

Positive Factors Affecting Master Card

• The effect executive compensation practices have on investors

• Their ability to attract, retain, and develop a highly-skilled workforce

• Their efforts to expand financial services to historically underserved markets

Negative Factors Affecting Master Card

• Oversight and management of business ethics issues such as fraud

• The amount of personal data they collect, their exposure to evolving or increasing privacy regulations

Want to do a little “detective work” yourself? If you are ever curious about a company's ESG efforts, most company websites have a section and a report specifically highlighting their sustainability.

How We Build the ESG Risk Scores for Our Strategy

It starts with research. We collect data on the ESG risk scores for each company in the S&P 500. Keep in mind that a higher ESG risk score indicates a larger exposure to risk. It’s like golf: the higher the score, the worse you’re doing.

Our aim is to reduce the overall ESG risk of the portfolio while maximizing returns.

Once we have that information handy, we look for the below-average ESG risk scores. The goal is simple: identify the “golfers” shooting far under par for their category.

Then we take the top half of these companies, based on their composite ESG score, to find out who’s “best of the best.”

Finally, we’ll do a qualitative assessment. We want to make sure none of the remaining companies on our list over-expose us to a single name or sector.

In the end? We’ll have a portfolio of companies with reduced risk exposure to their respective industry’s ESG factors. And we’ll know their prospects for remaining low-risk for the long-term future.

How To Invest Using the ESG Strategy:

If you’re already familiar with our quantitative portfolio strategies, then you already know there are a few ways to invest in this strategy.

The most direct way? Copy it directly from us. You can then update your portfolio every time we update the strategy. We do this about once per month, just like our other portfolio strategies.

You can also use this strategy as a “screen” for your own strategy. For example, you can use our list of names to whittle down your bets. You can then pick those stocks you think are best for your portfolio.It takes weeks of analysis to incorporate these strategies.

But with our simple list, you’ll cut out this busywork for yourself.

Holdings

Overview of Holdings

Why did we pick who we picked? What are these companies doing so well?

You’ll be glad to see there aren’t any picks out of left field. These are candidate companies sourced from the S&P 500—not exactly unknowns.

Let’s highlight which if these S&P 500 companies stand out for each component of the ESG strategy:

• Environmental

Juniper Networks, Inc. designs, develops and sells network products and services worldwide.

The Hartford Financial Services Group, Inc. provides insurance and financial services to individual and business customers in the United States, the United Kingdom, and internationally.

• Social

The Hartford Financial Services Group and W.W. Grainger are our top two companies by Social score.

Hartford Financial Services Group—we’ve already covered them. W.W. Grainger, Inc. distributes maintenance, repair, and operating (MRO) products and services in the United States, Japan, Canada, the United Kingdom, and internationally.

• Governance

Goldman Sachs and W.W. Grainger are our top two companies by Governance score, with The Hartford Financial Services Group coming in a close third! (Noticing a pattern?)

The Goldman Sachs Group, Inc. is an institution offering financial services for corporations, financial institutions, governments, and individuals worldwide. It operates through four segments: Investment Banking, Global Markets, Asset Management, and Consumer & Wealth Management.

Overall Score

Unsurprisingly, The Hartford Financial Services Group, W.W. Grainger, and Juniper Networks are our top holdings by overall ESG score.

It’s not just the ESG score. We also use the company’s market cap to determine the size of our positions.

With this strategy, we can follow broad movements in the market—but with the added boost of knowing the positive influence of low ESG risks.

In other words, it’s possible to have your cake and eat it, too.

Making the right financial decisions…while also doing right by the world.

Want to come along for the journey? Want to go green while gaining green?

Then check this space for updates to our ESG strategy in the future.