Bill Ackman Supports ESG Investing!
Bill Ackman dedicated a large portion of his 2020 annual letter to shareholders to the topic of ESG investing. He spoke about why ESG investing is important for great businesses, his sustainable investing philosophy, and what he believes the future holds for ESG investing.
Who Is Bill Ackman?
Bill Ackman is just one of the many superinvestors I follow. I feel no shame in admitting that. I watch a number of bigger investors and I think it’s a good idea to pay attention to what the biggest and the best are doing.
I mean, why wouldn’t you? This is a way to learn from the successes and failures of the best investors of all time.
Bill Ackman is the CEO and founder of Pershing Square Capital Management. He is best known for his reputation as an activist investor. For those of you that are not familiar with this, an activist investor is someone who purchases a large enough stake in a company in order to influence change within that company.
Activist investors don’t always have a great reputation but these investors do what they do in order to fix issues within a company in to create additional value for shareholders.
In his latest letter to shareholders, Bill Ackman talks about why he believes ESG investing is both good business and good for the world.
The Importance of ESG Investing
Bill Ackman begins his shareholder letter with a pretty powerful statement:
“I have come to believe that capitalism is likely the most powerful potential force for good in addressing society’s long-term problems. A successful business operating ethically and sustainably can create many thousands of high-paying jobs, deliver high long-term returns for pensioners, long-term savers and other investors, and provide goods and services that materially increase its customers’ quality of life, broadly defined.”
What Ackman is saying is that good businesses can have a significant impact in improving the world around us. He goes on to say that capitalism, of course, isn’t perfect. A company’s main goal is to be successful in whatever it is that the company does. But Ackman believes that companies that incorporate ESG criteria into their culture are all the stronger for it. And also have the ability to make the world a better place.
He goes on to say:
“We believe that good ESG practices are fundamentally aligned with running a successful business. As consumers and other corporate customers have become increasingly educated on matters of ESG, they have begun to avoid companies that contribute to climate change or do not treat their employees well, while rewarding companies with their business that have sustainable and responsible policies.
Similarly, a growing number of investors have become increasingly concerned about the risks of companies which do not take ESG issues seriously. These investors avoid investing in companies which do not meet high ESG standards, reducing the valuations and investment returns of these businesses, negatively impacting their cost of capital.”
Ackman makes an important point here. More and more investors are paying attention to the impact that companies have on our environment and our society. I don’t think it’s enough for a company to just be profitable. If that company is detrimental to society then the long-term success of that company is going to be limited.
Investors are beginning to steer their investment dollars away from companies that have a negative ESG impact and they’ve begun to invest in companies that are more sustainable and ethical.
ESG Analysis As Part of the Investing Process
Bill Ackman talks about ESG investing in the context of how he invests with Pershing Square.
“The emergence of ESG has provided an additional lens with which to evaluate how companies perform.
We believe that good corporate governance, including the management of sustainability risks, creates long-term value for shareholders. We consider ESG issues in our investment selection process, and as part of our ongoing stewardship once we have made an investment.
The most important criterion in our investment selection process is our assessment of the long-term quality of a business, which is informed by, among other considerations, our assessment of the long-term impact of the company on all of its stakeholders and society at large. As a result, assessing the sustainability risks of a potential investment is a critical component of our investment selection process.
Our focus on business quality has largely enabled us to avoid investments in businesses which make products or deliver services which we do not believe to be desirable, which treat their employees poorly, and/or which have long-term financial and legal risks that are a consequence of their negative externalities. We believe that this approach has helped us to avoid losses and generate profits by identifying great businesses that have contributed to our long-term investment returns, and by avoiding others which would likely have generated losses in the portfolio. We have still made mistakes (you know them well) when in certain cases, we failed to fully consider certain ESG shortcomings in a company’s approach to business.”
Ackman talks about business quality here. I think this is another important point. Ackman has a list of core principles that he uses to find and invest in great companies. Ackman looks for companies with a dominant market position with an excellent management team.
The best investors in the world all place a great deal of emphasis on the importance of investing in high-quality businesses. Some investors call this a moat or durable competitive advantage but the key point is to invest in quality businesses and Ackman believes good ESG practices are a fundamental part of high-quality businesses.
The Future of ESG Investing
So what does the future of ESG investing look like? I know you’ve heard me say it before but I believe that ESG analysis is going to become a fundamental part of investing.
That’s my thought but this is what Bill Ackman has to say about the topic:
“Environmental, social and governance (“ESG”) issues have emerged into the Zeitgeist, with considerable study and discussion in board rooms, and among investors around the world. Companies are evaluating how they interact with their stakeholders and what role they play in society. This self-examination will lead managements and boards to elevate the importance of ESG in how they govern and manage their companies, and implement their long-term strategies.
As capital is reallocated away from companies that rate poorly on ESG issues, boards’ and managements’ likely response will be to pivot their company’s business models to ones that are better for the environment and society.”
I already spoke to this so I won’t go into too much more depth here. Ackman again just stresses the fact that sustainability and ESG issues have become more important topics for our society overall. He believes that this is only going to continue and there is a lot of evidence that supports this.
The Forum for Sustainable and Responsible Investment publishes a trends report every two years. Their latest report showed that in 2020 there was 17.1 trillion US dollars under management using sustainable investing strategies. This makes up one-third of all US assets under professional management.
This means that one in every three dollars is invested using sustainable investing strategies.
ESG Investing is Good Business
Many people still hold the belief that it’s just bad business for companies to consider their long-term ESG impact. Bill Ackman goes over why he believes this to be wrong. Businesses that incorporate ESG criteria into their core values tend to be higher quality businesses than those that don’t.
It’s nice to see more superinvestors like Ackman throwing their support behind ESG Investing. I also think this is really telling. These people are not purely altruistic. Their first priority is to generate a return on their money. They consider ESG criteria in their investments because they believe there is financial benefit in doing so.
What are your thoughts about this? Let me know what you think in the comments below.
There’s one more resource I wanted to mention before we wrap up. Bill Ackman did a lecture about finance and investing that I think is just incredible. He goes over business fundamentals using the example of a lemonade stand. I wanted to share this video because it is a great resource if you’re looking to learn more about business, finance, and investing. I’ll include that link in the references below.