The ESG Investing Post
Should the way you invest your money represent your views?
This is a little different Middlebrow, though I do defend the idea that investing is ultimately a creative pursuit, even if you largely use passive strategies like index funds, ETFs, algorithms or other people’s model portfolios. Taken to its logical conclusion, that means that every investor has a style — a way of allocating their savings that reflects what they expect out of the world and how they want to participate in it.
ESG stands for “environmental, social and governance” though in practice, the focus is heavily waited towards the environmental impact of companies in a portfolio. This wasn’t always the case, however. ESG has also been known as impact investing, which is an old practice that dates to at least the Ford Foundation after World War II, where professionals allocated money to increase housing supply to minorities throughout the U.S. It’s also been known as “CSR” or Corporate Social Responsibility, which can mean a lot of things, because responsibility means different things to different people — maybe you think a CSR portfolio should not own casinos, because gambling is bad, or pornographers, or gun manufacturers, or usurious lenders. Companies can be excluded from these portfolios based on left or right wing views. Some of these portfolios are implicitly religious. It takes all kinds.
Then there’s the issue of shareholder activism. A lot of the investors, like public and private pension funds, who have a point of view of these issues are so large that they essentially have to own substantial positions in every stock or bonds available in the market. This means (they say) that they cannot simply exclude companies they deem misbehaving from their holdings. So they have to take the sometimes absurd position of owning a chunk of an oil company like Exxon Mobil while demanding that same company stop drilling for oil, despite Exxon Mobil’s other shareholders and customers wanting and even needing the company to keep the crude flowing.
This raises some interesting questions about power in the marketplace and the world. Shareholder democracy isn’t strictly democracy, after all — instead of “one person/one vote,” votes are apportioned by the amount and types of shares and investor owns. So, if a consortium of pensions funds representing more than $1 trillion in assets demand that a giant food corporation like Nestle adjusts its portfolio of products to de-emphasize its globally popular candy in favor of healthy alternatives, it raises questions about who holds the power — customers or investors? All shareholders, or just large shareholders?
Throughout the United States, local regulators are trying to force state-run pension funds to abandon ESG practices — considering such investing inherently political. Which, it is, but this cuts both ways as some investors rally for conversation social and environmental causes, which has recently impacted the fortunes of retailers like Target and global brewers like AB InBev. Investing is never politically neutral because it does involve making judgments about how companies are run and for what purpose. Also, since ESG and related disciplines are strategies, trying to ban them is a lot like trying to ban value investing (buying cheap companies) or momentum investing (buying investments on a presumed upswing).
ESG proponents will say that the strategy creates bottom line benefits for portfolios — it mitigates environmental risks, they say, and companies that do better by society or are well governed, are better performers. This has never been proven. Over the years, I have seen many ESG strategies perform well, but it’s because they have found reason to own hot stocks. Once upon a time, for example, Amazon was considered an ESG stock because its decentralized warehouses take up less physical space and use less energy than a brick and mortar retailer like Walmart. That view has evolved. Once sport a time, Tesla was once a hot ESG stock, but then people asked questions about its batteries and where the electricity to charge the cars will come from. It’s always in flux. The idea that a company with a strong environmental record is less vulnerable to global warming risks doesn’t even make sense. My commitment to renewables will not protect me from an indiscriminate hurricane.
Complicating all of this is the two way street of political action here — companies contribute money to politicians and lobby for their interests. They also sometimes outright fight with governments. A global company headquartered in a state with restrictive abortion regulation, for example, might threaten to move or try to get laws changed, because the laws hurt recruitment and complicate delivery of healthcare. In Florida, Disney is at odds with the state government over how issues related to homosexuality are taught in schools — which is something that Disney realizes is important to many of its employees and patrons. So, there’s a constant interplay between all of these companies and the public.
Mostly, it looks like ESG strategies sometimes outperform and sometimes underperform more “neutral” indexes like the S&P 500. Since ESG strategies are more expensive to run, there is also a higher performance hurdle. The fantasy has always been that there’s a way of “doing well by doing good” but critics have argued that investors seeking returns other than financial are probably making some trade-off. There are a lot of conflicting studies out there. Some people believe in positive ESG “factors” (a fancy word for the components of expected returns) and some don’t.
You can probably tell that I am not rising to a thesis here, because there isn’t one. The urge to legislate this seems not productive. I would say that, as a political issue, it is worth watching what big investors, and big companies, do and to judge for yourself whether they are behaving in ways that show respect for people in society who do not control trillions in assets because there are ways that both shareholder democracy and corporate activism lead to oligarchy. But I also wouldn’t worry about it much.
The biggest decision for most people is not how they invest but whether they invest and how much they can afford to put away.