How to think about ESG investing in a falling market

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

The current gut check comes at a point in the evolution of the investment industry when assets in so-called ESG funds surged 38% last year to $2.7 trillion by the end of March, according to Morningstar Direct. Professionals overlay all sorts of rules and screens on the investments they choose, using weather, diversity or other data to build what are now more than 6,000 funds around the world.

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

That could lead to episodes like one last month, when Elon Musk called the entire industry a “coup” after S&P Global had the temerity to remove Tesla from an ESG index. S&P did this, he said, in part because of allegations of racial profiling and other mistreatment of workers.

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

To try to help ordinary investors understand this, I turned to two professionals who have spent a lot of time examining ESG investments.

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

Here’s what they had to say.

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

FRIEND OF MY LORD Before we start, is this your preferred vocabulary? When I started it was an “ethical investment”, but I’ve lost so many vocabulary fights in my life.

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

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

LIEBER: Rachel, you were familiar with Amy’s funds. Did 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 confusing these days. On the one hand, some investors do not want to invest in weapons manufacturers. On the other hand, many of them would very much like to put more weapons in the hands of the Ukrainians.

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

LIEBER: Wait, so the government should be producing weapons?

DOMAIN: Capitalism is great at distributing goods and services widely and cheaply. Weapons must 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 very difficult to actively select the stocks that will do better than others in the long run. Does ESG investing not violate these principles?

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

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

LIEBER: Perhaps it is best for curious investors to play with the word “active” and think of ESG as activist investing. If anyone is going to pay the higher-than-average fees — or at least the higher fees than the basic index funds that companies like yours charge — it shouldn’t just be moving money silently from one public company to another. another in a way that may not have much of an impact. Activists bring pressure. They make noise.

DOMAIN: We wrote 150 companies in Japan pointing out that there were two genders and their advice didn’t reflect that fact. Japan doesn’t have robust shareholder resolution opportunities, 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 cut corners on their investment portfolios. There is a long history of concern in the investment industry that their funds are not 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. It won’t go away. It’s here to stay.

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

Organizing, mobilizing, educating other investors, gathering data sets – it all takes people. You have to be able to invest in them.

So I would really question if anyone is making an impact at a really low price. Many, many, many times with cheap ESG, you can hit a wall of data and stop. And what we did was break the data barrier.

LIEBER: That’s fine, but do you always trust the data you get from the companies themselves – the raw numbers or the way they might be selectively counting things?

ROBASCIOTTI: We use less data that companies provide on their own. Data independently collected by third parties who are verifying them against the practices of public companies is what we really stand for.

LIEBER: Elon Musk would disagree with the value that ESG brings. How would you try to persuade 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 fractured society can do nothing, including electric cars.

DOMAIN: He went after my industry instead of going after the index that excluded him. The entire industry didn’t kick him out.

LIEBER: Individual investors face dozens of ESG choices. Goldman Sachs and others expect household names to be important. What is the correct framing question that individuals should ask when purchasing funds?

ROBASCIOTTI: There are actually three. The first is, what are your problems? For us, this is racial, gender, economic and climate, because these are the places where capitalism unsustainably extracts value.

So how are you measuring this? And the most important question, without a doubt, is who decides what matters? Go to the people most impacted and ask what is significant, because they are closest to the problem and often farther from power. And that’s information investors aren’t getting these days.

LIEBER: What is the most non-obvious example of this third party?

ROBASCIOTTI: When we went to the Campaign for the Poor and asked what we should focus on, they got us to work with One Fair Wage, which is working to eliminate minimum wages for tip workers.

We created an entire “Investors for Viable Salaries” campaign and had a collective investor declaration that represented more than half a trillion dollars in investor money, through the signatories, advocating all public companies to end subminimum wages.

LIEBER: All this seems like a lot of work for the investor. Where is my interactive tool that allows just one of many backgrounds to drop in as my best choice?

DOMAIN: I feel that a step is better than not taking a step. I’m not totally stuck on who does a better analysis, or an analysis that is consistent with my own analysis. I looked at so-called strict portfolios that have stocks that I wouldn’t put in my portfolio.

LIEBER: So this analysis paralysis is my problem – isn’t that the industry’s problem?

DOMAIN: I like women-owned businesses if you want to start with something!

ROBASCIOTTI: Only 1.4 percent of all assets in US-based companies are managed by companies 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 set of people who haven’t been at the table yet.

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