RBC GAM VP on why the 'G' is underestimated and can lead to less volatile stock
While ESG is often taken as a single entity, one of the elements – environmental, social or governance – can sometime gain more prominence than the other.
However, Catherine Philogène, VP Product Management, RBC Global Asset Management, believes that the ‘G’ is sometimes underestimated. She views governance as a measure of how a company governs itself. For example, how is it structured? Are board members independent? What is the gender representation? Is the company free from bribery or corruption? Is executive compensation based on the short- or long-term performance? All pertinent questions to the health of a business and whether it's a viable investment.
Philogène cited an RIA survey in which men viewed the "E' as the most important factor and women selected the "S" as the most important.
She said: “Evidence has shown us that strong governance can lead to better management of social and environmental issues. Companies that have strong governance will likely have a lower cost of capital, better operating ratios, and ultimately less volatile stock prices.”
She added: “I was really interested in that survey … you could argue that governance is probably the most important, even though, ironically, it was chosen as the least important by both genders. While material ‘E’ and ‘S’ issues can impact investment performance, and can vary significantly by sector or region, governance issues, like independence and business ethics, tend to be material across all investments.”
Being a good corporate citizen, of course, can have a direct impact on a company’s reputation and how investors perceive their ability to run a good business and treat the communities in which they operate. Philogène said that when a controversial event happens that damages that reputation, there is often an underlying cause. In that case, it’s vital that investors know what steps the company has taken to remedy the situation and that stronger procedures are put together to mitigate those risks in the future.
She said: “We can certainly look at some controversies that have happened over time. The Deepwater Horizon oil spill is a well-known example of how an environmental catastrophe, coupled with the loss of life, had a lasting impact on BP stock price. Then, more recently, there was Volkswagen ‘Dieselgate’, which was another environmental example from a controversy standpoint but that had links to weak governance systems and oversight.
“It is important for companies to think about their policies and having strong governance in place with respect to their board. It sets the stage to have better management of environmental and social issues.”
Catherine Philogène was speaking during the WP Advisor Connect ESG virtual event during a session hosted by Caitlin Ebanks, ETF Leader, BlackRock, who is also co-chair of events and education for Women in ETFs. The panel also featured Bonnie-Lyn De Bartok, founder and CEO, The S Factor Co. and Priti Shokeen, Ph.D., executive director, MSCI.
Don’t miss our next virtual event, Women in Wealth Management, on December 1. For more information click on this link.
