How to think about ESG investing in a down market

Whenever the stock market falls, investors are likely to rethink almost everything.

The current gut check comes at a point in the investment industry’s evolution when assets in so-called ESG funds have grown 38 percent in the past year, to $2.7 trillion by the end of March, according to Morningstar Direct. Professionals cover all kinds of rules and screens for the investments they choose, using climate, diversity or other data to build what are now over 6,000 funds worldwide.

There is a cost to awareness: funds often have high fees that can reduce returns if the investments don’t do better than whatever alternatives you reject. And there is some confusion about what the term ESG – short for environmental, social and governance – means in practice.

This could lead to episodes like the one last month when Elon Musk called the entire industry a “fraud” after S&P Global had the audacity to remove Tesla from an ESG index. S&P did so, she said, in part because of allegations of racial discrimination and other mistreatment of workers.

Meanwhile, the Securities and Exchange Commission is frantically trying to catch up, investigating Goldman Sachs and other big banks and questioning whether some are slapping ESG labels on funds that may not deserve them to grab investors’ assets. .

To help everyday investors understand this, I turned to two professionals who have spent some time vetting ESG investments.

First up is Amy Domini, 72, founder and chairman of Domini Impact Investments and a pioneer in the ESG field. The second is Rachel Robasciotti, 43, the founder and chief executive of Adasina Social Capital, which describes itself as an “investment and financial activism” firm.

Here’s what they had to say.

DEAR RON: What is the most accurate definition of ESG today and how has it changed?

MY LORD’S AMY Before we start, is this a favorite dictionary? When I started it was “ethical investing” but I’ve lost so many vocabulary fights in my life.

I see it as providing a more robust set of material data points from which an investment advisor can make a decision.

And I see that as fulfilling a fiduciary obligation. Assets are not managed in the best interest of the beneficiaries unless, in fact, they cannot breathe or life is too dangerous at the end of building their wealth. So I see it as a means to an end, and that end is a planet that is livable – and lives worth living. And I see it as a strategy that explicitly accepts that investors have a role to play in delivering these results to the world.

LIEBER: Rachel, you knew Amy’s funds. Have you come to a different conclusion?

RACHEL ROBASCIOTTI: We call our work “investing in social justice”. It is the deep integration of four areas: racial, gender, economic and climate justice.

LIEBER: Defining justice seems messy these days. On the one hand, some investors do not want to invest in arms manufacturers. On the other hand, many of them would very much like to put more weapons in the hands of Ukrainians.

ROBASCIOTTI: In the world our investors want to live in, the government is responsible for weapons and defense and this is not a private activity.

LIEBER: Wait, so the government has to make guns?

DOMAIN: Capitalism is great at distributing goods and services widely and cheaply. Weapons should not be distributed widely and cheaply.

LIEBER: Academics have been talking for years about how so-called active investing is a bad idea — that it’s too hard to actively pick stocks that will do better than others over the long term. Doesn’t ESG investing violate these principles?

ROBASCIOTTI: To do a good job of social justice investing, you have to be active on those issues and pay attention when a company’s behavior changes in a way that has a real, material impact on its future.

DOMAIN: Take the square. They had an undeniably strong story of empowering small business owners, a strong theme of economic justice that you could get excited about. As they became more and more of a blockchain company – to the point where they changed their name, that initial exciting thesis became less and less present.

LIEBER: Perhaps it’s better for curious investors to play with the word “active” then and think of ESG as activist investing. If one is going to pay the higher-than-average fees — or at least the higher-than-index fund fees that firms like yours charge — it shouldn’t just be moving money quietly from one public company to another in one way which may not have much impact. Activists apply pressure. They make noise.

DOMAIN: We wrote to 150 companies in Japan, pointing out that there were two genders and their boards did not reflect this fact. Japan doesn’t have strong shareholder resolution options, but that doesn’t mean you can’t have some activism.

LIEBER: We are in a bear market right now. This is often a time when people are looking to reduce costs in their investment portfolios. There’s a long history of hand-wringing in the investment industry about the fact that your funds aren’t cheap. Do you lose in these types of market conditions?

DOMAIN: You have ESG products now at Vanguard, Fidelity, TIAA. Everyone is doing it because it adds value to the investment decision-making process. This does not go away. It’s here to stay.

ROBASCIOTTI: Historically, women, people of color—especially black people like me—were not allowed in the industry. And now that we’re starting to come out, we’re in a situation where we have this huge price pressure. “Lower your rates!”

Organizing, mobilizing, educating other investors, putting together data sets – all of this requires people. You should be able to invest in them.

So I would really ask if anyone is giving impact at a really low price. Many, many, many times with free ESG, you can hit a data wall and stop. And what we’ve done is break down the data wall.

LIEBER: OK, but do you always trust the data you get from the companies themselves – the raw numbers or how they can selectively count things?

ROBASCIOTTI: We use less of the data that companies provide themselves. Data independently collected by third parties that are verifying the practices of public companies is what we really rely on.

LIEBER: Elon Musk would beg to differ on the value ESG adds. How would you try to convince him in 100 words or less?

ROBASCIOTTI (laughing): Here’s what I’d say: The reason you’re confused is because you’re a single-issue CEO, and that’s not the way of the future. The way of the future is people and the planet, and a broken society can’t do anything, including electric cars.

DOMAIN: He went after my industry instead of going after the index that excluded him. The whole industry did not throw him out.

LIEBER: Individual investors face many ESG choices. Goldman Sachs and others hope household names will matter. What is the correct framework question that individuals should ask when shopping for funds?

ROBASCIOTTI: Actually there are three. The first is, what are your problems? For us, they are racial, gender, economic and climate because they are the places where capitalism produces unsustainable values.

So how are you measuring it? And the most important question, beyond a shadow of a doubt, is who decides what matters? Go to the people who are most affected and ask them what is important, because they are closest to the problem and often furthest from power. And that’s information investors aren’t currently getting.

LIEBER: What is the most invisible example of this third?

ROBASCIOTTI: When we went to the Poor People’s Campaign and asked what we should be focusing on, they led us to Working on a Fair Wage, which is working to eliminate sub-minimum wages for tipped workers.

We created an entire “Investors for a Living Wage” campaign and had a collective investor statement representing over half a trillion dollars of investor money, through signatories, getting all public companies to end the minimum wage.

LIEBER: This all seems like a lot of work for the investor. Where is my interactive tool that allows just one of the many funds to drop out as my top choice?

DOMAIN: I guess one step is better than no step. I am not entirely dependent on who makes a better analysis, or an analysis that is consistent with my analysis. I have looked at so-called strict portfolios that have stocks that I would not put in my portfolio.

LIEBER: So this analysis paralysis is my problem – it’s not the industry’s problem?

DOMAIN: I love women owned firms if you want to start something!

ROBASCIOTTI: Only 1.4 percent of all assets in US-based firms are managed by firms owned by women or people of color. So you can narrow your universe right there.

The reason this matters is that doing it the way we’ve always done it has given us the world we have now. If we’re going to have a different world—if we’re going to invest in doing more of what we really want—we’re going to have to choose a different group of people who haven’t been at the table yet.

Leave a Comment

Your email address will not be published.