Today’s fast-growing investment fad seems to be ESG investing. ESG stands for “environmental, social and governance,” the pillars of “sustainable” investing. Or so they say. To me, ESG is politically correct investing—and it’s going to cause a lot of well-meaning fools and their money to part ways.
In my view, investing on any basis other than profit can’t properly be called investing. The essential idea of investing is to deploy capital for expected return. Financial return.
Deploying capital to try to change corporate culture, or society as a whole, is at best philanthropy.
Why not combine the two? Many wealthy investors end up becoming philanthropists. Others have found they can boost profits and beat their competition by improving workers’ conditions. So why not, as Benjamin Franklin used to say, do well while doing good?
This can be done. Indeed, there are large and successful businesses premised on supplying the demand created by people’s good intentions.
But it’s one thing to invest in a business like Whole Foods, which has a stated goal of profiting from delivering healthier food to consumers. It’s quite another to “invest” in order to encourage or force companies to adopt uncompetitive practices. Whole Foods, for example, was openly opposed to unionization before its acquisition by Amazon. Despite all its appeal to certain aspects of modern American “liberal” thinking, Whole Foods was always focused on making money. And so was Benjamin Franklin, by the way.
Adopting bone-headed recycling programs that cost more than they save isn’t good business. Paying wages that greatly exceed the value of unskilled work is bad business. Implementing politically correct policies that are counterproductive won’t help people or the planet if it bankrupts the businesses that adopt them, making us all poorer.
A business—any business—has to be a business first and foremost, or it won’t last.
It’s hard enough to make money focusing on that goal alone. As speculators, deploying capital on the basis of political correctness is asking for failure. Better to simply give the cash to a non-profit that works on some ESG goal if that’s what you really want.
Some might argue that applying an ESG filter to one’s investments is a form of risk avoidance. Most millennials embrace such politically correct values and they are coming into wealth and power in politics and the marketplace. It could become risky to invest in companies that don’t at least pay a lot of lip service to ESG business practices.
Perhaps so. I could see this as a serious risk for companies producing easily substituted products. I could see it being vital for businesses like fashion that derive value almost entirely from consumer perception.
But paying workers more than their work is worth is not a risk; it’s a mathematical certainty that it’s a bad business practice. It’s going to push employers to fire a lot of people and replace them with robots. And if politicians tax the robots, it’s going to bankrupt a lot of businesses. I’m not risking my hard-earned money on companies that consciously embrace ruinous business practices.
And at the end of the day, if companies produce better/cheaper/faster products, people will buy them—even if they don’t like management’s old-fashioned values.
This is not merely a philosophical question. In today’s world, investors will increasingly have to be on the alert for ESG booby traps.
For instance, a reader recently wrote in asking if was right to invest in uranium companies, since uranium is used in making nuclear weapons. He wanted to know if there was a way to tell if one’s investment might contribute to the proliferation of these weapons. I answered that I doubt it, at present, but there’s no way to know.
I also argued that even if some of the companies we speculate on were to produce some uranium that eventually gets used in weapons, that would neither be our fault nor responsibility. The same could be said for copper, iron, or any other raw material that’s used on military hardware as well as civilian uses. There’s more iron in a nuclear missile than there is uranium.
But there’s more to this than the impossibility of having no connection at all to nuclear weapons without becoming a hermit…
There’s an important difference between investing in a company—as in giving it money through a private placement or an IPO—and simply trading the stock.
If I invest directly in a company, I give it money it can use to make nuclear weapons, internet spyware, publish books promoting Modern Monetary Theory (MMT), or for other potentially destructive things.
But if I buy stock in a company involved in such businesses, I don’t give the money to the company. I give it to another investor. And If I sell my shares, the person buying them doesn’t support the company either; they just give me money. Unless I’m like Warren Buffett, taking ownership of a significant portion of a company, my speculations have no material impact on the company at all.
Would I really buy shares in such a company like one promoting MMT books? Probably not. They might argue that millennials will buy tons of them, but I’d be skeptical of the business. Few would be likely to actually read such a book when they can get the online summary for free—and it supports their existing views.
More important is that if I did buy shares in such a company on a stock exchange, I might find it distasteful, but I wouldn’t see it as unethical.
I wouldn’t be publishing the books myself. Nor would I be helping the company do so in any meaningful way. And heck, is the trade worked, I could turn around and use my profits to fight MMT.
The spyware example is more realistic. I’m not talking viruses, but the sort of things Facebook, Apple, and Google do with very little real understanding among their users. If any of those stocks got cheap enough—well, Apple and Google, anyway—I could see myself speculating on a rebound. If I did, I wouldn’t feel guilty for doing so, nor responsible for anything those companies did.
That’s my take,
Friday, May 24, 12:50pm, EDT, 2019