Seeking to minimize risk is a key element of our integrated investment process. It is driven by the belief that evaluating a company's record of corporate responsibility helps reduce risk and can contribute to our investment success. We believe companies with strong fundamentals that actively work to evaluate and report on the costs and benefits of sustainability initiatives may pose less risk to long-term investors. We recognize there are no perfect companies and companies actively working to mitigate and improve their social and environmental impacts are not to be summarily dismissed from investment consideration.
Our fundamental analysis—coupled with our corporate, social and environmental evaluation—provides a unique and more comprehensive view of the companies we consider for investment, and helps us identify more forward thinking and potentially more promising companies.
The initial review is conducted by Sentinel's equity analysts who assess whether or not companies:
Companies with material involvement in these areas are eliminated from further qualitative review and investment consideration. Additionally, U.S. and Canadian companies, as well as foreign companies operating internationally, that lack one element of diversity at the level of the board of directors or within the top tiers of management are not considered for investment.
Companies that pass through the initial review are eligible to be purchased by the fund. Companies are then submitted to our sustainable investing team for a more in-depth qualitative review. Through a disciplined process, our research analysts produce a detailed evaluation of corporate policies and practices culled from diverse data sources and direct dialog with the company under review.
It is our review and analysis of both the fundamental and corporate behavior that we believe helps us identify the most promising companies and manage investment risk. No investment is ever made for social reasons alone, and all holdings are monitored to ensure our standards for corporate responsibility are met. If a company fails the qualitative screening process, the company is no longer eligible for investment and must be sold if it is held in any of the funds. Securities are rescreened when we have new information that suggests a change in facts that could affect the social research decision.
The inclusion of Sentinel's extensive qualitative screening in the investment process is to seek to identify companies with useful products, strong corporate governance practices, a history of environmental stewardship and good employee and community relations. In each area our research focuses on whether or not a pattern of violations, large fines or other liabilities and lawsuits exist, which can affect shareholder value. In particular we evaluate:
Business Practices and Corporate Governance
We assess each company’s operations, including compliance with laws and regulations and overall transparency and disclosure practices. Companies that are frequently involved in disputes over anti-trust allegations, boycotts and various forms of fraud generally spend more time and resources defending their practices in lawsuits and other legal actions. Poor business practices can also harm a company’s reputation and hurt shareholder value. Studies have shown that transparent, independent and responsive leadership at companies is associated with higher financial returns over time compared to other companies in the peer group.
We evaluate a company’s environmental performance by looking at both overall environmental impact and environmental stewardship/management. We examine toxic releases, climate change impacts, and biodiversity impacts. The legal/fines and management review explores the company’s ability to manage and minimize its environmental impacts. In addition to reducing their negative effects on the environment, companies with proactive environmental efforts also reduce their risk of environmental fines, liabilities and/or lawsuits that may threaten shareholder value.
A company’s record on human rights and discrimination issues helps us identify whether a company may have risks associated with time and resources being spent defending their practices in lawsuits and other legal actions. We also monitor employee turnover, which can affect productivity, sales and profitability.
A poor human rights record and discrimination against customers and employees can also harm a company’s reputation and hurt shareholder value. Such problems can lead to increased turnover, which in turn can affect productivity.
Diversity and Equal Opportunity
A growing number of studies have shown that greater diversity among employees and management is associated with better financial performance. A 1998 study by Hillman, Harris, Cannella and Bellinger found that S&P 500 companies with more diversity had better stock returns with less risk of loss to shareholders. The companies with the most women and minority directors produced gains 21% higher than companies with no diversity. After a company passes Sentinel's initial diversity review, our research analysts evaluate a company’s management diversity, as well as a company’s policies and practices to promote greater employee diversity.
We evaluate how management treats its employees as it relates to health and safety, labor relations, benefits and supplier issues. Poor working conditions may lead to injuries or illnesses and thus to lost time or fines for non-compliance. Tension in labor-management relations can lead to strikes and reduced productivity. Dissatisfaction with working conditions, benefits or management attitude may lead to higher turnover. In all of these cases poor labor practices can affect a company’s bottom line and respectively, shareholder value.
Our sustainable investing team evaluates a company’s effect on local and global communities. We favor companies that take a proactive approach to minimizing their negative community impact and/or foster community development. Companies can affect communities in both positive and negative ways - by providing jobs, and supplying products and services, or drawing on natural resources, emitting toxic waste or emissions, among others.
Manufacturers can have adverse material impacts on community health through pollution, community displacement and natural resource depletion (e.g. water use). Service providers also can affect the communities in which they operate. For example, banks can negatively or positively affect local communities through their lending practices. Positive community stewardship, both locally and globally, is an important aspect of corporate social responsibility.
Companies, which minimize their negative community impact and promote positive community stewardship reduce their risk of serious litigation and fines that may threaten shareholder value.
Learn more. Ask your financial advisor for more information about Sentinel Funds.