I came to a realization as I was reading Altria’s most recent quarterly earnings report and call transcript: Altria is such a wonderful company, I thought.
While my understanding of what it does is limited, as I have yet to read its annual report, I have some idea of its operations. It sells cigarettes and is venturing into the vape or so-called smokeless products. In a nutshell, they are selling nicotine in various shapes and forms.
I thought to myself, what a beautiful business: it generates a lot of profit and cash flow and returns a relatively good amount of its capital to shareholders. You have a product that contains a chemical known to develop addiction, but at the same time, it is legal. It is frowned upon in society, but it’s legal, and I have many friends who smoke packs of them every day. Yes, I think I am a second-hand smoker. A lot of fund managers are likely to avoid it as well, as I don’t think it falls on the favorable side of the ESG spectrum.
Then it struck me: good businesses are not those that give me a 20-30% return overnight but those that compound for a very, very long time. For a business to be able to compound for a long time, it must have a sustainable business model with a large moat. By definition, the sustainable business model needs to incorporate some aspects of ESG (Environmental, Social, and Governance) principles in order to be able to realize its economic sustainability. It needs to be sustainable for the environment, society, and its corporate governance.
I think ESG matters, just like a lot of other things, and just like a lot of other things, people tend to go overboard with them. With ESG, it’s gotten to a point where companies implement ridiculous policies just to show that they’re ESG or DEI (Diversity, Equity, and Inclusion) compliant, often just raising eyebrows and, on some occasions, being detrimental to their business.
When I was still working in IT at a financial services firm, our CIO sent out an email about how to be inclusive in the terms we use, which included avoiding terms like whitelisting/blacklisting, master/slave, and man-days. It was also unspoken but happened that people were requested to hire a specific gender, racial group, or person with a disability to fulfill the “DEI” quota. That is just ridiculous. It went so far that during an interview session for new hires, there was a row of women university students sitting in the waiting room. One of them asked me during the interview, “Are we hired for diversity because all of the applicants are women?” which is uncommon in the IT field.
To conclude, this is to remind myself that ESG matters, not because you need to tick a box, but because it directs you to the economic sustainability of the business. Great businesses are those that can compound value to shareholders for a long time.