Martin Whittaker is the CEO of JUST Capital, and he serves on the Carbon Disclosure Project North America board of directors.
In this interview, Fool analysts John Rotonti and Maria Gallagher talk to Whittaker about JUST Capital's not-for-profit, unbiased, and transparent approach to providing environmental, social, and governance (ESG) research and rankings, how it incorporates the public's priorities into its rankings, how JUST Capital engages with corporate America to help businesses improve their ESG scores, how Whittaker sees ESG evolving over the next several years, and so much more.
The Motley Fool: JUST Capital has exploded into the ESG field over the last five or six years, and it's one of our favorite sources of ESG research at The Motley Fool. Can you please tell our readers about JUST Capital? What's its history? Who are its founders? What's its mission? And what does JUST Capital do?
Martin Whittaker: Well thank you, that's kind of you to say. We are very passionate about what we do. In a nutshell, JUST Capital is an independent nonprofit organization, which believes that business, and capitalism, can and must be a force for greater good. We create research, rankings, and data-driven tools to empower people to invest in, work for, buy from, and support companies that most align with their priorities. The ultimate goal is to build a more just marketplace that works for all Americans, one that deals with people's economic insecurities and heals fear and division. The fault lines of capitalism cause widening inequality and social conflict, and undermine our ability to mount sustained, collective efforts to tackle our most pressing challenges: education, health, local and global environmental well-being, community vitality, upward mobility, and more.
We are essentially trying to fix the misalignment between how markets currently function, and how we -- as a society -- need them to function. We seek to be completely unbiased and independent, so our work is trusted. We want the data we gather, and the rankings and products we produce, to be known as the most credible in the industry. Transparency is at the heart of everything we do.
We were founded in 2013 by a group of concerned people from the world of business, finance, and civil society -- including Paul Tudor Jones II, who is our chair, Deepak Chopra, Rinaldo Brutoco, Arianna Huffington, Paul Scialla, and others. They wanted to create a race to the top, where we incentivized large corporations to take a leadership role in tackling some of the country's most pressing social problems. Without markets as part of the solution, it will always be an uphill battle. Since that time, we've published an annual Ranking of America's Most JUST Companies, created the Forbes JUST 100 List, launched an award-winning new ESG ETF, released groundbreaking research on the business case for just business behavior, and much more.
The Motley Fool: As CEO of JUST Capital, what are your priorities, and where do you focus your time and attention?
Whittaker: My priority is to make sure JUST achieves its mission as effectively and successfully as possible. That means setting overall objectives and working with the team to develop and execute strategy, and drive the outcomes we want. In the early years I was focused on all things you need to do to build an organization from scratch. Now that we are more established, I tend to divide my time between the major strategic questions and challenges, addressing the critical operating issues -- board matters, raising money, building our brand, etc. -- and representing us externally. Overall, I try to bring a vision for where we need to go. We feel a strong sense of urgency. We have a major opportunity before us to create a new framework for how markets work in this country and around the world, and how they align more closely with people's core values. Applying Adam Smith's Theory of Moral Sentiments, you might say.
The Motley Fool: Can you discuss JUST Capital's ESG framework and some of the criteria you use to rank companies?
Whittaker: Sure. First of all, we don't think of it as an ESG framework. We think of it as a framework that captures the public's priorities and defining criteria for just corporate behavior. We give the public a blank sheet to identify these criteria -- or core issues -- and how important they should be in the model. To capture these issues in both a holistic and detailed way, we carry out a very comprehensive and structured series of focus groups, surveys, and polls, each and every year. Since 2015, we've reached more than 85,000 Americans on a fully representative basis. Year over year, the public has prioritized worker pay and well-being as the top issue for companies, followed in 2018 by customer treatment, product quality, environmental impact, job creation, community health and well-being, and leadership and shareholders. So these are the seven overall themes, and under each we identify more specific criteria for measurement, which we call components. There are roughly 40 in total, looking at whether companies pay a living wage, provide worker training, prioritize diversity and inclusion in their workforces, respect customer data privacy, support their local communities, source locally, create good jobs, and even generate long-term profitability.
The Motley Fool: Does JUST Capital put more emphasis on one particular area within ESG (either the "E," the "S," or the "G"), and how is JUST Capital's research and/or ranking system different from that of other ESG research providers?
Whittaker: Because our rankings are based on the priorities of the public, we don't place emphasis anywhere; we simply reflect how the public feels about business behavior. As it turns out, the public does in fact focus a lot on what in ESG parlance is the "S." When you look across all the things we measure, the majority relate to how people, or communities, are served by companies. Worker pay and well-being are the most heavily weighted, and accounted for 25% of a company's score in 2018. That's not to say environmental and governance issues aren't important -- they clearly are. But the priority for most people is the human or social dimension. The overall model incorporates a holistic view of business practices -- from whether companies pay a living wage to whether they mitigate customer privacy issues to whether they minimize greenhouse gas emissions. Company scores are based on all these issues -- and strong performance in our rankings, and inclusion in the JUST ETF, is contingent upon high scores across the board.
This is one of the things that differentiates us from other ESG research providers: the range and nature of issues we cover. We are also the only research organization that uses the priorities of the public as a guide for corporate analysis, ranking, and fund management. Our data on public sentiment on corporate behavior, and how people think about corporate purpose, is truly unique. Another major difference is our level of transparency -- many other ESG providers are black-box models in which analysts determine ratings according to expert models. We are totally transparent. We show the companies we rank everything -- the data and the data sources, our scoring methodology, our metrics, all the polling data, everything. We invite them to critique our methodology, engage with our research team, question aspects of our work, and even give us data. We want to reflect their performance as accurately and as openly as possible. Our full methodology is published on the website.
The other major difference, which is actually very important, is that we are not simply a ranking or rating company in the business of selling ratings. We are a nonprofit with a crucial mission. This means that our process, our rankings, our metrics, and our data are geared toward achieving actual outcomes -- to measuring the changes that companies are making across the issues we track, in order to drive change. Measuring actual impact, and ultimately outcomes, is a major differentiator.
The Motley Fool: In ESG investing, there's increasing emphasis on identifying and analyzing "material" ESG issues for different companies and industries. How does your focus on typical Americans' opinions on the priority of certain issues fit within the materiality conversation?
Whittaker: In our conversations with the public, and in our survey work, we don't limit the scope to issues deemed to be material. We simply want to know what people define as being just -- meaning fair, ethical, or right. That said, the upshot of all this work has been to capture issues that we believe are deeply material to corporate competitiveness, social standing, performance, and financial returns. We have created an entire workstream dedicated to assessing the question of financial materiality of the just model components, which we call JUST Alpha, and the results of this work support the case for just performance as a driver of return. On the one hand, it's not surprising. A company that looks after its employees, treats customers well, invests in communities, makes healthy and beneficial products, drives job creation, and is led with integrity is pretty much bound to be a great company. There's also an element of the wisdom of the crowds. In the same way that Peter Lynch in the 1980s would pick companies by walking around retailers and seeing what was moving off the shelves, we have identified companies by crowdsourcing the things American workers, investors, customers, and community members prioritize. It's no surprise these things are material. JUST companies routinely post higher ROEs (return on equity) than their counterparts, and our flagship index has outperformed its benchmark by over 300 basis points since inception.
The Motley Fool: Can you briefly explain JUST Capital's ESG research process and what are some of the sources you use to gather information on a company's ESG profile in order to provide them with a JUST ranking?
Whittaker: As we've discussed, we base our rankings on our comprehensive annual survey -- and in 2018, Americans identified seven key issues that define just business behavior, which are then broken down into 36 components (also derived from our polling) that are weighted according to the public's priorities.
To produce the rankings, we identify, collect, and analyze data from a diverse range of public sources -- including CSR (corporate social responsibility) reports, company websites, and media -- on how each company actually performs across the various components, utilizing over 110,000 data points across 76 unique metrics. This process is independent, transparent, and unbiased, and we take care to gather the best and most reliable information we can. We share this analysis with each company before we publish it, giving them the opportunity to provide feedback and share any additional or up-to-date data.
We also work with a diverse Research Advisory Council of academics, economists, and subject matter experts, who advise us on how we can best measure corporate behavior. And finally, we provide full transparency on our methodology, to ensure what we are doing and how we are doing it is accessible and understandable to anyone.
The Motley Fool: What types of products (research, indexes) do you provide, and who is your target audience?
Whittaker: We provide a number of products and tools to help people invest in, work for, buy from, and support companies that align with their priorities. First, our Rankings of America's Most JUST Companies, published in partnership with Forbes, evaluate the largest, publicly traded U.S. companies against the priorities of the public. People viewing the rankings can explore how companies rank overall, how they rank by industry, and how they rank on the core issues identified by the public. They can also compare companies head-to-head, or compare company scores against JUST 100 and industry-average benchmarks.
Ranked companies themselves have access to our corporate portal, where representatives can explore their scores, benchmark their performance, and provide feedback on their data. Each company included on the JUST 100 and Industry Leader lists are awarded a JUST Seal to display on their websites, products, and environments, as well as in advertising and promotional materials. The Seal acts as a badge of honor for corporations that are leading change on the issues Americans care about most.
We currently have two indexes that track our rankings -- the JULCD, which looks at the top 50% of companies by industry in our rankings and forms the basis of the JUST ETF -- and the JUONE -- which tracks the top hundred companies (the JUST 100) in our rankings. We've also published research- and data-driven tools to help investors, companies, and the general public better understand how companies perform on the issues that matter most -- including our Rankings on Corporate Tax Reform, the Win-Win of JUST Jobs, the Top 100 Companies Supporting Communities and Families, and our JUST Alpha research on the investor case for just business.
The Motley Fool: What are the 10 currently highest-ranked JUST companies?
Whittaker: In 2018, the top 10 companies were:
- Microsoft (MSFT 2.14%)
- Intel (INTC 5.84%)
- Alphabet (GOOGL 0.92%) (GOOG 0.87%)
- Texas Instruments (TXN 3.93%)
- International Business Machines (IBM 1.68%)
- NVIDIA (NVDA 2.54%)
- VMware (VMW 4.21%)
- Procter & Gamble (PG 0.01%)
- Adobe Inc. (ADBE 5.95%)
- Cisco Systems (CSCO 1.69%)
The Motley Fool: Can you dive into one of those 10 businesses and explain why it scores so highly on JUST Capital's ESG framework?
Whittaker: Our No. 1 company Microsoft tops the list to no one's great surprise -- their high score is largely a product of performing well across all the issues the American public deems important. For example, the tech giant conducts regular pay equity analyses and found in 2017 that male and female employees are paid equally. On the environmental front, Microsoft's global operations achieved 100% net carbon neutrality in 2012 -- a major endeavor that spanned over 100 countries. In January, Microsoft made a major commitment to its local community, announcing that it would invest $500 million in affordable housing in Seattle, and within the last year, it has made efforts to address data privacy issues and push for paid parental leave among its suppliers.
In other words, Microsoft is strong in many areas of its business -- and its leadership on these core issues earns the company the top spot in our rankings.
The Motley Fool: Do you engage with the companies that you are ranking to inform them about areas where they are strong as well as areas where there is potential room for improvement in their ESG profile?
Whittaker: Absolutely. Of the 890 companies we rank, we're engaged in some way with 355 of them. That includes reviewing their performance relative to their peers on issues of importance to the American public, conversations about where they're leading and lagging, and overall questions and ideas for ways to signal leadership. We're also having a lot of conversations behind the scenes, convening companies on issues like human capital transparency and living wages, as well as how they can empower and invest in their employees, with a particular focus on the front-line workforce. Fundamentally, we are committed to achieving our mission, which is creating a more balanced and inclusive form of capitalism, and that has to include engaging with companies across issues.
The Motley Fool: Are companies, in general, receptive to your feedback, and do you find that they are motivated to make changes to improve their ESG profiles?
Whittaker: They absolutely are. One head of sustainability recently told us that the way we quantify ESG has allowed her company to connect the dots internally on the focus, from treatment of workers to environmental impact to overall performance. In their proxy statement this year, General Motors CEO Mary Barra's compensation for 2018 is tied in part to her company's score in our rankings, which we hope to see more of. Certainly, there's a range of interest, but fundamentally we believe and are seeing, that companies want to be better and just need some help understanding how to get there.
The Motley Fool: Tell us about the JUST Scorecard.
Whittaker: We often hear from corporate leaders that they are looking for more tools and resources that can help them align their business practices with the values of the American public. The JUST Scorecard builds on our survey results and the metrics we use to evaluate companies and creates a resource for them to use in starting a discussion around their current status and future goals for their corporate practices. There are also more sophisticated digital tools in our corporate portal for companies to benchmark their practices against industry averages or the scores of their peers. This is something we are keen to build out, as we know companies want more guidance on how to actually improve their performance.
The Motley Fool: Please tell us about the JUST U.S. Large Cap Diversified Index (JULCD). How is it structured? What are its fees? And how has it performed over time?
Whittaker: The JULCD is the flagship JUST Capital index, based on our Rankings of America's Most JUST Companies and calculated by FTSE Russell. It tracks the top 50% of companies ranked by JUST Capital by industry and is constructed to match the Russell 1000 industry weights.
The JULCD Index began live trading in November 2016. Cumulative performance for the JULCD versus the Russell 1000 since inception on November 30, 2016, is 44.7%, compared with 40.58% for the Russell 1000. The JULCD has returned 412 bps outperformance over the Russell 1000 since inception. There are no fees on indexes, but the JUST ETF -- which tracks the JULCD -- has a fee of 20 basis points.
The Motley Fool: What is the Goldman Sachs JUST U.S. Large Cap Equity ETF (JUST 1.40%)? How is it different from the JULCD index, and what is JUST Capital's relationship with Goldman Sachs?
Whittaker: JUST Capital has a range of investable research. In order to support our mission of driving capital toward just companies, and to broaden our presence within the investor community with a strong partner, we licensed the JULCD Index to Goldman Sachs Asset Management (GSAM). On June 13, 2018, GSAM launched the Goldman Sachs JUST U.S. Large Cap Equity ETF -- the first ever exchange-traded fund designed to align with the American public's priorities for just business behavior, based on JUST Capital's research. The ETF seeks to provide investment results that closely correspond, before fees and expenses, to the performance of the JULCD. The JUST ETF ended its first day as one of the most successful ESG ETF launches to date and was named best new ESG ETF of 2018 by ETF.com.
The Motley Fool: There is lots of research indicating that companies that prioritize ESG generate high returns on invested capital (ROIC) and alpha (or market outperformance). Why do you think this is? Do you think it's because high-quality companies that generate high ROIC have the excess free cash flow (FCF) that can be used to invest in ESG initiatives? Or do you think it's because companies that prioritize ESG take a holistic, systems-based approach to managing all aspects of their business well, and that these businesses understand that treating all stakeholders (including employees, customers, suppliers, communities, and the planet) well is a way to both mitigate risk and drive long-term sustainable growth? Perhaps it's a bit of both?
Whittaker: This is the classic question about what comes first -- profitability or ESG leadership. I think it begins with company leadership taking a more holistic, expansive approach to what drives value for their business over the long term, across their stakeholders, and then investing in these areas as a way to reduce risk and create higher-quality, sustainable growth. Successful CEOs, investors, and business leaders will know this. The idea that only high-quality companies that generate a lot of FCF can decide to invest in ESG initiatives seems to me to be flawed. For one thing, if they are that successful without considering ESG issues, why would they change their ways and start to do that? That logic also implies that ESG issues are luxury items, or investments that can only be made once you are successful. I don't think you need to pass some profitability threshold before you start to offer a fair wage, or great training for your employees, or make healthy products, or behave ethically. That doesn't make any sense to me. Great businesses, profitable businesses, look after their stakeholders first and foremost; that's what makes them successful, and it's where the excess ROIC and alpha come from. How you measure that effectively is the tricky part.
The Motley Fool: Do you think that having a corporate culture that prioritizes ESG is a long-term sustainable competitive advantage that is underappreciated by the market, and perhaps another reason why companies with strong ESG scores generate high ROIC and beat the market over time?
Whittaker: I certainly think that having a culture that values these factors is important for companies to compete effectively today, that the market is figuring out how to process it, and that these issues will become more, not less, important over time. We have seen, for example, that the most just companies in almost every sector outperform their lowest-ranked peers. We have found that just companies have higher operating margins, and that they often have higher price-to-book ratios. That said, I do get concerned about oversimplifying things. It's more complicated than simply equating a higher ESG or just score with a higher ROIC. There are no guarantees, obviously, and understanding the causal connections between just performance, ROIC, and market valuation is something that will take a lot more research and analysis. Part of the challenge, as we've discussed, is how you measure "ESG," and what that even means. There are many ways to do it, and not all are meaningful or based on high-quality data. Obviously, I think we have built a model that is unique and very credible and offers a new way for investors to think about companies. But I would be very cautious in making claims about causal factors that allow investors to consistently beat the market.
The Motley Fool: JUST Capital recently released a list of the Top 100 U.S. Companies Supporting Healthy Communities and Families. Please tell us about this list and some of the criteria you used for the rankings.
Whittaker: With support from Robert Wood Johnson Foundation, JUST Capital released this list to elevate the companies taking the lead on supporting healthy communities and families, tracking their performance on key issues -- from paying a living wage and providing good benefits to maintaining strong community relationships and minimizing pollution.
We found that, compared with other companies in the Russell 1000, the top 100 performers on the list on average pay 87% of their workers a living wage (vs. 75%), produced 52% lower greenhouse gas emissions intensity in 2017, and generated 3% higher ROE over the last three years.
Through its impact on jobs, housing, transportation, education, and the environment, business plays a critical role in building a culture of health. By shedding light on these issues, we hope our list sparks a dialogue around how companies can invest in the improved health and well-being of communities where they operate, driving a true culture of health in America today.
The Motley Fool: Does JUST Capital publish a list of "green" companies that strive to grow their business in an environmentally friendly manner?
Whittaker: For Earth Day this year, we published a list of the Top 33 Companies for the Environment by Industry, which showcases how leading companies -- across all industries -- are moving the needle forward on environmental impact. As part of this research, we also found that industry leaders for the environment earn a higher median ROE than their peers, confirming that leadership on environmental issues is not just good for the planet, it's good for business.
The Motley Fool: You partly rank companies on how "justly" they treat their employees. Would you mind discussing JUST Capital's own workplace culture and your efforts regarding equitable pay, healthcare benefits, diversity, inclusion, employee engagement and development, and work-life balance?
Whittaker: This is a big priority for us. We have invested heavily in modeling the just business behaviors we track and analyze at big companies. We strive to create a culture that is supportive, aligned, and results oriented. We provide best-in-class healthcare benefits, flexible work-life balance policies, and we ensure that all employees are compensated in a fair, equitable, and competitive way, not only in relation to nonprofit peers but comparably sized private-sector companies. For instance, we offer top-shelf health, vision, and dental care; 20 personal-time-off days; 15-plus holidays, 5 sick days, and a flexible work-from-home policy; a 401(k) retirement plan with employer matching; as well as subsidized gym, Citi Bike, and pre-tax commuter benefits. We have built a diverse team, and offer training on leadership, unconscious bias, and other areas that relate to specific skills. We are very proud of the culture we've created, but we know it is a work in progress that requires continual attention and investment.
The Motley Fool: What's next for JUST Capital? Will you be throwing ESG conferences? Have you considered releasing deep-dive company-specific ESG reports?
Whittaker: We are in expansion mode. We want to broaden the number of companies we cover, invest in our data and research capabilities, expand the programs work we are doing, and continue to grow the brand. Building a better ESG data platform is critical to unlocking the investment dollars seeking to move into the space, and we are working hard on that. One of our goals is to support the launch of more JUST fund products, across different asset classes and investment strategies, and to build tools so that investors and corporate leaders can use our data to drive decision-making. We are certainly planning a bigger conference and are seeking partnerships now for that. We also have some major initiatives planned to raise our organization's profile and spark a national movement for a more just marketplace.
The Motley Fool: Where do you see ESG investing going over the next 5 or 10 years?
Whittaker: I see it moving away from ESG to mainstream investing. The demand for ESG solutions is so great right now, that in 10 years, I expect it will be unusual NOT to have some form of ESG or JUST overlay or input associated with an investment strategy. I also think there will be a major step forward in data and transparency. One of the things I am convinced about is that the application of data science techniques will fundamentally impact the ESG data world. I can even see the traditional ESG ratings industry disappearing, as market regulation on ESG disclosure and the push for greater ESG data transparency take root. There will also be major advancements in terms of how we assess the ultimate impacts and outcomes of ESG. Part of our key points is that this isn't about managing the externalities but instead fundamentally running companies in ways that better quantify their impacts and abilities to address major social and environmental problems.
The Motley Fool: Is there anything that investors should be aware of as they start to learn more about ESG investing and as ESG investing grows in size? In other words, are there any pitfalls to ESG?
Whittaker: One of the things I always caution ESG investors about is managing expectations. Be careful. Understand your own objectives. ESG investing is like anything else. It can be done well, or it can be done badly. Don't assume it will lead to higher returns, or that it will produce the impact outcomes you seek. To identify the strategies that produce both returns and ESG impact takes work and experience, but it can be done. Be as disciplined about your analytical and research processes on ESG as you are about everything else; ask the tough questions about the underlying data, the assumptions baked into ESG strategies, and understand what you want to get out of it. Done well, it can be very rewarding.
The Motley Fool: Is there anything else you'd like us to know about JUST Capital?
Whittaker: Only that we are open for business and seeking partnerships with anyone who reads this. The more people and organizations that use our data, rankings, products, and research, the better. Our mission has never been more important. We really need to get markets focused on addressing our social and environmental challenges and restore faith that capitalism can work for more Americans. Thanks for the chance to talk about JUST Capital!