3 steps to identify the most impactful companies to invest in

By Howard W. Buffett 4 minute Read

Every year brings another wave of challenging climate news, but 2022 seems to be off to a particularly rocky start. From the IPCC Climate Reports to the crisis in Ukraine to the federal government’s struggles to pass any serious climate legislation, the news is filled with warning signs. Compounding these challenges is growing disillusionment with the private sector’s role from public skepticism of corporations’ sustainability claims to misplace expectations around emerging Environmental, Social, and Governance (ESG) ratings.

It’s easy to get caught up in the bad news, but I choose to find optimism in companies who are actually doing the right thing. Investors who want to support these businesses—ones that operate with sound social and environmental policies and embrace positive innovation and disruption—just have to know where to look. That’s, of course, easier said than done, but a little extra effort can be worth a lot.

Here are three responsibility starting points to help others identify companies that go beyond traditional corporate social.

1. Seek out the organizations that don’t just report—but act

The number of companies filing corporate social responsibility reports has never been higher. But, as noted by impact investment experts, such as Ken Pucker, this rise in reporting has not correlated to a similar reduction in environmental impact by corporations. The takeaway: Reporting alone is clearly not the solution.

While it’s useful for companies to at least have a base-level awareness of their carbon footprints, this information is just data if the companies don’t learn from it. The companies that actually take the next step and integrate sustainability value drivers into their core business models are the ones to watch.

Think of a company, such as Case New Holland Industrial, an industry-leading manufacturer of agricultural and construction equipment. Case New Holland has developed a comprehensive global sustainability strategy, and is achieving ambitious goals regarding energy use, waste, and circular product lifecycles. It’s no surprise they have been the top scorer in the Dow Jones Sustainability Indices 11 years in a row: Not only are they de-risking their own operations, they’re de-risking the whole system they rely on.

Companies such as these are using the massive global climate challenge to catalyze innovation and positive change, ensuring increased growth across all time horizons.

2. Find companies looking beyond scope 1 and 2 emissions

The vast majority of companies that report on their sustainability footprints only look at their own direct emissions and their indirect emissions from purchased energy. That’s understandable—quantifying a company’s downstream effects and the upstream emissions it doesn’t control is fundamentally complex. But it is also a concerning miss: Upward of 90% of a company’s emissions can fall outside scopes 1 and 2.

As a growing number of examples proves, though, the companies that are truly determined to understand their sustainability footprint don’t let this challenge stop them. Take Inari, a late-stage plant genetics startup based in Cambridge, Massachusetts. Inari is leveraging MIT’s Dynamic Systems Modeling to quantify the expected direct and downstream effects of their seed products. They use complex models to project the social and environmental footprint of their actions and also proactively calculate the best products and programs to reduce specific amounts of specific emissions. Considering that our planet is at a tipping point with climate change where time is running out to make suboptimal decisions, this level of analysis is invaluable.

3. Don’t rely on traditional ESG ratings

Despite their recent negative coverage, ESG ratings do serve a purpose. It’s just not usually what they’ve come to be associated with. Most rating systems are trying to assess the economic risks to the company based on ESG factors; they do not measure the E and S impacts a company is having externally in the world.

For prospective investors seeking to gut-check a system, simply look at the MSCI ratings of companies like Exxon or Philip Morris. When an oil and gas company—whose core business model is built on activities that damage a healthy future—has anything but a negative score, you know that the ESG rating is not measuring impact.

Instead of worrying whether a rating is misleading, conduct your own research. Look up annual reports. Download and read them. Gauge companies’ intentions by understanding their objectives, strategies, and real-world actions. Consume enough of this information, and it becomes fairly clear quickly which companies’ sustainability efforts end with a fancy report and which go much further.

The news is that it should become good easy to find the companies that are actively working to support a healthy future for our planet. Although imperfect, climate disclosure rules like those enacted by the EU and proposed by the US Securities and Exchange Commission are positive signs. So is the explosion of new tools, sophisticated modeling, service providers, and growing interest in the impact investing space.

Of course, time is short—every day, climate challenges become more pronounced. But my optimism grows as more data and resources become available for people investing in a brighter future for our planet.

Howard Buffett is an associate professor at Columbia University’s School of International and Public Affairs. His award-winning research, Social Value Investing: A Management Framework for Effective Partnerships (Columbia University Press, 2018), analyzes innovative collaborations from across sectors and outlines a new methodology to measure social and environmental impact. Buffett advises on ESG and sustainability issues as a board member for multiple global corporations, including Toyota North America, Case New Holland Industrial, Inari, REEF Technology, S2G Ventures, and StateBook International. He previously served as executive director of the Howard G. Buffett Foundation and coauthored the New York Times best seller, 40 Chances: Finding Hope in a Hungry World (Simon & Schuster, 2013). He was also a policy advisor for the Domestic Policy Council in the White House, where he worked on cross-sector partnerships and the impact economy.

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