Newsletter 12/27/2020

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Hello!

Let me be the first to welcome you to the weird week between Christmas and New Years that isn’t quite a holiday, but somehow feels like it. Last week, I talked about the first reason we started Hoskin Capital: we get to help our clients in the best and worst of times. Today, I’ll reflect on the second reason: We started HC to share an investment strategy that benefits the planet and our society. 

When we first talked about Hoskin Capital being an investment advisory business, we knew we wanted to be impact investors, but we weren’t entirely sure it was a good idea. I had heard from both my academic and professional mentors that ESG investing is “just a fad” and that it forces investors to sacrifice returns. Their comments echo the rhetoric we had heard from other money managers, so we had to assume there was truth in there somewhere.

So, rather than start a company on a hope, we sat down to figure out exactly what “impact investing” means. Over the course of three months, between July and October, we broke impact investing into three key components and studied each one.  

First, the Environment

In the already-popular strategy of ESG investing (Environmental, Social, and Governance), a company is “environmentally friendly” if it hurts the environment less than its peers. Under the current ranking structure, companies like BP actually count as responsible companies because they are slightly better for the environment than, say, Exxon! 

We said, perhaps in less polite words, “screw that”. First, we removed all companies that produce oil products, chemicals, unsustainable lumber, or gas-burning vehicles. Then, we defined environmentally friendly companies as companies that:

1. Have a carbon neutrality plan with a target year of 2040 or sooner

2. Are actively adopting renewable energy usage

3. Are offsetting their current emissions via carbon credits or a proxy 

Second, our Society

Again, ESG ratings are a comparative measure, and this allows companies like Altria and Phillip Morris to be considered “socially responsible companies”. If you haven’t heard these names before, these are the two largest producers of tobacco products in the world. Need proof? Take a look at the holdings of the iShares Evolved US Consumer Staples ETF, which is an ESG fund according to MSCI’s ranking system. 

Our strategy eliminates tobacco companies, military contractors, gun companies, and any company that discriminates in its product/hiring or misuses customer data. Then, we define a socially responsible company as one that:

1. Sells a product or service that improves the quality of living for their customers

2. Promotes a culture of acceptance and equality in their workplace

3. Makes products that have “equal utility” for all target customers (i.e. makeup companies that make products for all skin types)

Third, Innovation

The G in ESG stands for Governance, which deals with executive pay, lawsuits, and leadership practices. In our research, we discovered that Governance is actually a “redundant factor”. We found that the effect of a company’s Governance on its operations is already explained by their Environmental and Social priorities. For instance, if a company gets sued every other month, it’s usually because they are violating some environmental or social mandate.

So, if Governance has a negligible effect, what is the third element that contributes to a company’s impact? Our research has shown that a company’s Innovation is the factor that truly drives its impact. A company can be perfectly environmentally and socially responsible, but if it lacks a groundbreaking edge it will never make a tangible impact on the world. This missing factor may also explain the lack of performance in most ESG funds, because companies that display the ESG criteria are not necessarily innovative. By scoring companies based on their Innovation, we maximize the impact of the portfolio and improve its returns.  

So… what?

After over 1,000 hours of researching, ranking, backtesting and arguing, we had developed a strategy that provides healthy returns for our investors while tangibly benefiting both the environment and our society. We believe that investing responsibly will force bad companies out of favor in the capital markets. As a direct result, they will struggle to raise money, their CEO’s will be paid less, they will fail to hire quality talent, and they will inevitably change their ways or fail. 

We knew that Hoskin Capital has the ability to unite impact-oriented investors and accelerate this cleaning process. Knowing we could grow our clients’ wealth while making a positive impact, we had to get started. 

So here we are! With 2021 fast approaching, we are gearing up for a huge year of growth and impact. If you have some time in the coming weeks, set up a free Discovery Meeting! There is no obligation to sign up and at the very least, you will leave having learned something new about investing or your own financial ecosystem. 

Thank you for your attention, and I hope you have a wonderful New Year! Warm regards,

Nate Hoskin, CIO

Hoskin Capital, LLC