The Nuns Were Onto Something: Dana’s ESG History

Posted by Dana Funds Investment Team on Apr 14, 2022 2:47:25 PM

With a 20-year history in ESG investing, Dana was one of the earliest entrants in the space. It all started with a request from a group of nuns.

Dana’s ESG story began at the tail end of 1999. We were working with a group of nuns who needed equity exposure. This group held zero equities in 1999, so we got them comfortable with moving into holding stocks, but they had some values-based controls that they wanted to place on their portfolio. They wanted their investments to align with their Catholic values, so they didn’t want to hold alcohol, tobacco or firearms companies. They needed to be sure there were no pornography publishers among their holdings. They’re nuns. It was a must for them and we understood.

ESG investing at Dana started in response to that client request from the nuns and has grown since then. It’s evolved from creating one values-oriented portfolio for one specific client into applying a values-oriented ESG investment approach to our strategies.

 

First Step: Excluding What Doesn’t Fit

The nuns wanted to incorporate more depth into their portfolio, and this encouraged us to incorporate more depth across all our strategies. This happened at a time when Enron and WorldCom were in the news for major accounting scandals. As their stock prices tumbled, the investing public realized management’s potential to build — and destroy — shareholder value, raising the importance of independent board members and auditors.

Governance became a household phrase, or at least it entered the general parlance of investment advisors. Among religious orders, governance had always been a touchstone. When the sisters requested that we exclude certain industries from their equity holdings, including alcohol, tobacco, firearms and the like, we started researching the effect of having that constraint on our portfolios. We noticed these portfolios on a risk-adjusted basis, allowing for many of the other common investment factors, were outperforming their peers. So, we spent a lot of time thinking about why that might be, and that led to ESG integration across our portfolios.

 

Second Step: Including the Leaders

ESG investing, as we see it now, has inclusionary components in addition to exclusions. We look at what products a company makes, but we also look at the transportation of those products, their supply chains, how employees are treated in their manufacture and distribution, and their impact on the earth and on future generations. We seek to include companies that are working toward net-zero emissions, that are leading in workplace safety, that are incorporating diverse backgrounds and opinions in their C-suites and boardrooms.

Layered on top of these inclusionary factors is the fact that we are sector neutral. Our strategies track the S&P 500 basket of companies and we try to keep our weights pretty closely aligned with that index. This means that, for example, although airlines as a group are not environmentally friendly, we do not exclude them from our investing universe. Some of these companies are seeking out more efficient routes, treating their employees better, than their peers. The same can be said of energy companies. We do our own research to seek out the companies that are leaders and not laggards, not according to a scorecard on a big index’s website, but according to our research team and portfolio managers.

 

Third Step: Engaging to Effect Change.

This leads to the next level of ESG investing, which comes when we engage with the folks making the decisions. If management is willing to talk about paths they can choose that will bring them more in line with our values, we are effecting change. Rather than voting with our feet, we are staying put, sitting at the table, and working toward that better world that our clients trust us to invest in.

 

Catholic Values Investing: What Does That Mean?

We manage a Catholic values portfolio. What does that mean? Well, it started with the nuns, who have a long history of active investing. Entrusted with retirement income from women serving as nurses, teachers and community leaders, the Women Religious (as they commonly call themselves today) have to combine fiduciary responsibility and Catholic values to meet their goals. What it means to us has evolved over time, but it incorporates all three levels of ESG investing. We believe the best results, the most impactful outcomes, come when we exclude truly problematic industries, include the top companies that come from our research, and engage with those that fall in between. Catholic values drive how we define each step.

 

Do ESG / Values Based Portfolios Actually Work?

The risks inherent in investing are mitigated when we look at the long-term. These include climate risk, reputation risk, and the risks associated with management/shareholder/stakeholder issues.

The nuns and Dana aren’t the only ones who have seen the impacts and results of ESG investing. A study by Statista shows that the S&P 500 ESG index outperformed the S&P 500 index by roughly 3.7% over the three years leading up to October 2021. And both Morningstar and the Morgan Stanley Institute for Sustainable Investing found that ESG portfolios (of both stocks and bonds) outperform their non-ESG peers in down — and volatile — markets.1

Returns vary, and past results are not indicative of future performance, which everyone knows. But everyone still looks for short-term gains. What we try to communicate to our investors is that our investments do well long-term because we research issues that affect their long-term value, including ESG factors.

 

The Nuns Led the Way: We’re Still Going

As we look to the future of our investment strategies, we see a deep connection to our past and what first drove us to values-based investing. Exclusion of unacceptably immoral or high-risk industries; inclusion of companies that are working toward a better world, and active ownership of those in limbo between the two. Catholic values merge with investment process to meet clients and companies where they are and move them forward with grace. Grace and the potential for long-term results in alignment with their values.

 

1 https://www.gobyinc.com/last-few-years-esg-and-market-volatility/
https://www.statista.com/statistics/1269643/s-p-500-esg-normal-index-comparison/
https://www.morningstar.com/articles/988114/article
https://www.thinkadvisor.com/2020/06/16/the-case-for-esg-funds-during-volatile-times-morningstar/

 


 

You should carefully consider the investment objectives, potential risks, management fees, and charges and expenses of the Dana Funds before investing. The Funds’ prospectus contains this and other information about the Fund, and should be read carefully before investing. You may obtain a current copy of the Funds’ prospectus by calling 1-855-280-9648. Past performance does not guarantee future results.

The Dana Funds are distributed by Ultimus Fund Distributors, LLC. There is no affiliation between Ultimus Fund Distributors, LLC. and the firms referenced in this blog post.

ESG Investing: Environmental, Social and Governance (ESG) investing may take into consideration factors beyond traditional financial information to select securities, which could result in relative investment performance deviating from other strategies or broad market benchmarks, depending on whether such sectors or investments are in or out of favor in the market. Further, ESG strategies may rely on certain values based criteria to eliminate exposures found in similar strategies or broad market benchmarks, which could also result in relative investment performance deviating. There is no assurance that employing ESG strategies will result in more favorable investment performance.

The thoughts and opinions expressed in the article are solely those of the author. The discussion of individual companies should not be considered a recommendation of such companies by the Fund's investment adviser.  The discussion is designed to provide a reader with an understanding of how the Fund's investment adviser manages the Fund's portfolio.