Sustainable Profits: We’re All in This Together

By Adam O'Dell  |  September 6, 2019

What is the commonality shared by the CEOs of Apple, Bank of America, Caterpillar, Duke Energy, Exxon Mobil, FedEx, General Motors, Home Depot, IBM, Johnson & Johnson, and Xerox?

It’s the same commonality shared by 181 leading U.S. public corporations, in fact.

Surprisingly, it’s the recent admission that the U.S. corporation ought to serve all their stakeholders (including customers, workers, suppliers, and the communities where they operate) and not solely shareholders.

This opinion piece penned by Jeffrey Sachs, professor and director of the Center for Sustainable Development at Columbia University, highlights a document published last week by the Business Roundtable, a group of the country’s top CEOs, which aims to address issues of corporate governance.

The original document is titled: “Business Roundtable Redefines the Purpose of a Corporation to Promote ‘An Economy That Serves All Americans.’”

I hope you’ll take a few minutes to read both pieces. I don’t link to external material often, but I think the sustainability of Corporate America and the free-market system upon which it exists is a really important issue.

Sustainable Profits for Shareholders

I have to admit, I’ve spent most of my career defending the “shareholder-first” doctrine that preceded this latest policy turn by the Business Roundtable. Meaning, I supported the idea that the primary responsibility of a corporation’s CEO is to maximize profits for shareholders.

I still believe that to an extent — the caveat being I now believe the CEO’s responsibility is to maximize sustainable profits for shareholders. And further, I believe that sustainable profits are best achieved by corporations that are able to balance the varying needs of all stakeholders.

This topic dovetails with the piece I originally wrote in Secrets of a 7-Figure Trader on JUST Capital, legendary trader Paul Tudor Jones’ non-profit organization. Which, much like the Business Roundtable’s members, believes that corporations “win” when they operate in a way that’s sustainable and fair to all parties, including workers, customers, suppliers, and community members.

That’s why, in addition to checking out the two links above, I hope you’ll have another read of my take on JUST Capital, republished below.

Reprint: A More “Just” U.S. Large-Cap Fund

According to a recent Alliance Bernstein report:

Greater scrutiny of environmental, social and governance (ESG) factors has gained significant momentum over the past decade and is becoming an essential ingredient for building responsible investing portfolios. Some countries are further along than others, but the trend is clear.

Here’s the chart they published, showing the percentage of companies referencing UN sustainable development goals in public filings:

Now, I’ll point out that “ESG” investing is not a new concept. It’s been around a long while, but has until recent years failed to gain traction.

Simply put: A lot of people think it’s a “hippy thing.”

The main idea behind ESG is that — even for a capitalist system, in which pursuit of profits is key — there are “good” and “bad” ways of conducting business.

ESG proponents are in support of conducting business the “good” way, to use the simplest of labels. And they typically advocate for Corporate America to act responsibly. While also giving investors tools for determining which companies they should invest in, if investing in “good” companies is even a consideration for them.

Many times, an investor’s ESG pursuit takes the form of what’s called negative screening. That means the investor will remove certain stocks from consideration because of a moral or ethical objection they have with it.

Cigarette stocks are a classic example. Many investors refuse to own them for moral or “ESG” reasons.

Some investors don’t want to own oil stocks because of the fossil fuel industry’s impact on the environment. Other investors may avoid certain biotech companies over ethical concerns about gene-modification technology. And the list goes on.

I’ve personally never been a fan of negative screening, even though I do care greatly about the issues the ESG movement centers on.

So, I was particularly excited when I learned about what I think is a far better approach to ESG…

Introducing JUST Capital

Paul Tudor Jones is one of the most successful and wealthiest hedge fund managers of all time.

He’s also a philanthropist. And the driving force behind JUST Capital, a not-for-profit charity organization that, according to its mission statement, “helps people, companies, and markets do the right thing by tracking business behaviors Americans care about most.”

What exactly does all that mean?

Well, I had the pleasure of hearing Paul Tudor Jones speak at the Inside ETFs conference this year, where he shared the JUST Capital story and value proposition.

It goes like this…

First, we shouldn’t assume we know the desires and preferences of investors and, more broadly, the American people.

So JUST Capital has conducted extensive surveys of the American people (over 80,000 responses in total) to determine which issues are most important to us, and to what degree.

It turns out the environment is indeed an important issue to the American people, but it ranks behind fair treatment of both workers and customers.

Job creation is another important issue, according to survey results, as is a company’s involvement with and impact on the local community.

All told, JUST Capital seems to have homed in on the issues that are most important to Americans. And they suggest these are the issues people consider most influential in our decision-making, whether we’re deciding which company to invest in, work for or buy a product or service from.

You can read more about the specific issues here.

The Importance Behind Identifying These Issues

Why is identifying these issues so important?

Because if these are the issues driving the decisions of America’s investors, workers and consumers… then these are the issues that the “good actors” in Corporate America will be rewarded for!

To me, this approach is opposite that of the negative-screening approach I described above. Instead of suggesting an investor not invest in Philip Morris because they make cigarettes, JUST Capital works to highlight companies you should invest in.  Because of that company’s commitment to being a “good actor” and appropriately addressing the issues most important to America’s investors, workers and consumers.

The idea is that these “good” companies will actually outperform “bad” companies, simply because they operate in line with what Americans value.

I don’t know about you, but that makes a lot of sense to me!

If that resonates with you, this approach to “good,” or “just,” investing is available in a one-click ETF solution — the Goldman Sachs JUST U.S. Large-Cap ETF (ARCX: JUST).

The construction of this ETF is pretty straight-forward. JUST Capital ranks each of the 1,000 companies in the large-cap Russell 1000 index based on how well they score on the issues deemed most important to Americans. And then they buy the 500 top-ranked stocks, while leaving the 500 bottom-ranked stocks alone.

Again, the idea here is that the 500 top-ranked stocks will outperform the 500 bottom-ranked stocks, since the top-ranked companies are operating in a way that’s in line with Americans’ preference for “good.”

Along with the potential for outperforming the market, investors in the JUST ETF can feel good about supporting companies that are above-average on the “doing good” axis.

For example, highly-ranked JUST companies…

  • Produce 45% lower greenhouse gas emissions per dollar or revenue
  • Give 2.3-times more to charity
  • Pay 94% less in Equal Employment Opportunity Commission fines
  • Pay 71% less in fines for consumer sales-terms violations

That’s great. But the advantages to highly-ranked JUST companies aren’t limited to fluffy “feel-good” things. There’s also evidence that JUST companies perform better than their peers on traditional measures, as JUST companies…

  • Create U.S. jobs at a 20% greater rate
  • Employ twice as many workers in the U.S.
  • Are twice as likely to pay nearly every worker a living wage
  • Have a 7% higher return on equity (ROE)

All told, the Goldman Sachs JUST U.S. Large-Cap ETF (ARCX: JUST) is a low-cost, diversified U.S. Large-Cap fund. It has a tilt toward companies that are “doing good,” as measured by the issues actual Americans have said are important to them. And therefore drive their decisions about which companies to work for, which companies to buy from, and which companies to invest in.

I think it’s a great proposition!

Maybe you’re the type of person who buys a few shares of the SPDR S&P 500 ETF (NYSE: SPY) every month, aiming to build a passive “buy-and-hold” retirement nest egg. If that’s the case, I hope you’ll at least consider the Goldman Sachs JUST U.S. Large-Cap ETF (ARCX: JUST) as a worthy alternative.

You may just find yourself outperforming the market… and supporting “good” companies!

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