The 20th-century view of shareholder primacy is flawed. By focusing first on creating wins for all stakeholders—customers, employees, suppliers, and society—companies build a sustainable, beloved enterprise that paradoxically delivers superior returns to shareholders in the long run.

Citing a Harvard Business School study of 1,800 companies, Sir Ronald Cohen reveals the staggering scale of negative externalities. A third of these firms (600) cause environmental damage equivalent to a quarter or more of their profits, while 250 create more damage than they make in profit, highlighting the financial materiality of impact.

ESG ratings are a flawed product because, like a Big Mac, you don't know what's inside them. They are aggregated, opaque, and lack a clear connection to financial outcomes. The industry needs to move away from these blunt ratings toward transparent, factual data on specific factors like environmental footprint or workforce loyalty.

The true financial benefit of ESG or sustainability factors may not be in mitigating drawdowns, but in accelerating recoveries. Factors like employee satisfaction and a smaller environmental footprint contribute to a company's resilience, allowing it to bounce back faster after a crisis. This is the key link between ESG and long-term performance.

The model of pressuring tech companies to go green doesn't apply to major industrial emitters like oil and steel. For them, the cost of eliminating emissions can be several times their annual profit, a cost no shareholder base would voluntarily accept.

Instead of treating ESG as a subjective measure of corporate virtue, view it as a risk management framework. Its true value lies in identifying and quantifying material risks—like poor labor relations—that function as off-balance sheet liabilities, ultimately impacting a company's cash flows or discount rate.

The fund's core belief is that an impact lens can uncover economic returns unavailable to traditional investors. The strategy is not about sacrificing returns, but demonstrating that understanding impact benefits can directly translate into long-term economic outperformance, thereby influencing broader capital allocation.

Investment research suggests the significant performance signal in governance isn't achieving a perfect score, but rather avoiding companies in the worst decile. The key is to steer clear of clear red flags—like misaligned boards or poor capital allocation—as this is where underperformance is most clearly correlated.

Crossmark Global Investments' analysis reveals that while excluding sectors for ethical reasons causes short-term performance deviations, long-term returns (over 1, 3, 5, and 10 years) are comparable to unscreened portfolios. Strong fundamental analysis remains the primary performance driver.