In our polarized age, perhaps it should be no surprise that the idea of values-based investing would inspire strong views. Carolyn Donnelly, a managing director at CIBC, says her team saw it firsthand when they held an event to introduce clients to the idea of investing through an ESG lens, or screening investments based in part on environmental, social, and corporate governance considerations.
“Well, of course,” said investors in their mid-40s or younger. “Why would I invest in a way that doesn’t align with my values?” Many older clients, Donnelly said, took precisely the opposite view. They were angry at the suggestion that someone would try to impose moral judgments on their money. The advisor’s job, they said, was to maximize returns. Period.
But the generational—and philosophical—divide may be smaller than the grumpy oldsters and naive young ’uns believe.
Let’s start with the “G.” As Adam Seessel pointed out in an eloquent takedown of ESG in last year’s version of this special section, all investors care about corporate governance. Enron and Lehman Bros. taught us that, if we didn’t already know.
The “E” is more fraught, but does it really need to be? Sure the “climate change is bunk” crowd lives on, but rather than get into a meteorological argument, I’ll just point to property and casualty insurers. For decades, they have been pulling back from low-lying areas. Does anyone believe that the actuaries are motivated by politics? And if they were, wouldn’t an apolitical entrepreneur come along and make a killing by writing policies on oceanfront properties no one else would insure? Would you bet your retirement savings that, 10 years from now, we’ll have more power from coal and less from solar and wind?
The “S” represents the biggest divide in the ESG discussion. Some people won’t want to invest in companies that provide contraception benefits in their health-care plans, while others want to avoid those that don’t. Go ahead and vote your conscience. Or, if you really believe that investors should focus only on returns, then you might ask yourself which of those companies is likely to have a broader pool of young job applicants to choose from.
In the meantime, as government pulls back from regulation, the free market is working out a lot of the social issues on its own. Salesforce, Delta Air Lines, Amazon.com, eBay, and Walmart have taken stances on guns. Nike took sides in a bitter debate by using Colin Kaepernick in an ad campaign. YouTube changed its policy on hate speech. Auto companies are actually pressuring the government to boost fuel-efficiency requirements.
All of these companies were acting in their own self-interest. In fact, in the age of social media, reputational risk has increased dramatically. At Barron’s Impact + ESG Summit on Thursday, investment analyst Caleb Tuten of GMR noted that in 1975, tangible assets accounted for about 85% of the S&P 500 index, while the rest was intangible assets. Now it’s the other way around, and 85% of the market’s capitalization is made up of intangible assets, including brand value. Alienating your customers is not good for your stock price. Values and valuation can go hand-in-hand.
Here’s something we can all agree on: The Dow Jones Wealth & Asset Management Group has just raised its journalistic game. Veteran Barron’s editor Beverly Goodman is taking on the additional role of editorial director for our group, and will help us produce more special reports like this one, across a variety of investing subjects and multiple platforms.
Jack Otter
Associate Publisher,
Dow Jones Wealth & Asset Management Group
https://www.barrons.com/articles/how-esg-investing-can-boost-returns-51561160163