How to think about ESG investing in a falling market

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

The current test comes at a time when the investment industry is evolving, with assets in so-called ESG funds rising 38 percent in the past year to $ 2.7 trillion by the end of March, according to Morningstar Direct. Professionals impose all sorts of rules and screens on the investments they choose, using climate, diversity or other data to build what is now more than 6,000 funds worldwide.

There is a price to mind: funds often have high fees that can reduce returns if investments are no better than any alternatives you reject. And there is a lot of confusion about what the term ESG means in practice – abbreviated from environmental, social and governance.

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

Meanwhile, the Securities and Exchange Commission is frantically trying to catch up, investigating Goldman Sachs and other major banks and questioning whether some of them are putting ESG labels on funds they may not deserve to grab investment assets.

To try to help everyday investors make sense of this, I turned to two professionals who spent a lot of time checking out those who wanted ESG investments.

The first is Amy Domini, 72, founder and chairman of Domini Impact Investments and a pioneer in ESG. The second is Rachel Robashioti, 43, founder and CEO of Adasina Social Capital, which is described as an investment and financial activism firm.

Here’s what they had to say.

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

EMY ON MY LORD Before we begin, is this the preferred dictionary? It was an “ethical investment” when I started, but I lost so many vocabulary battles in my life.

I see it as providing a more stable set of essential data points from which the investment adviser can make a decision.

And I see it as a fiduciary duty. Assets are not managed according to the best interests of the beneficiaries, if in fact they cannot breathe or life is too dangerous at the end of the construction of their wealth. So I see it as a means to an end, and that end is a habitable planet – 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.

LIBER: Rachel, you were familiar with Amy’s means. Have you come to another conclusion?

Rachel Robotchi: We call our work “investing in social justice”. This is the deep integration of four areas: race, gender, economic and climate justice.

LIBER: The definition of justice seems confused these days. On the one hand, some investors do not want to invest in arms manufacturers. On the other hand, many of them would like to put more weapons in the hands of Ukrainians.

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

LIBER: Wait, so the government has to make weapons?

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

LIBER: Academics have been talking for years about how so-called active investing is a bad idea – that it is too difficult to actively choose stocks that will do better than others in the long run. Doesn’t ESG investing violate these principles?

ROBOTS: 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, material impact on its future.

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

LIBER: Maybe then it is better for curious investors to play with the word “active” and think of ESG as an activist investment. If someone is going to pay higher-than-average fees – or at least higher-than-basic fund fees charged by companies like yours – it doesn’t have to be just transferring money silently from one public company to another in a way that which may not have much impact. Activists are putting pressure. Make noise.

DOMININS: We have written 150 companies in Japan, stating that there are two sexes and their advice does not reflect this fact. Japan does not have stable shareholder restructuring opportunities, but that does not mean that you cannot be less active.

LIBER: We are now in a bear market. This is often the time when people want to reduce costs in their investment portfolios. There is a long history of wringing hands in the investment industry about the fact that your funds are not cheap. Do you lose under such market conditions?

DOMININS: You already have ESG products in Vanguard, Fidelity, TIAA. They all do it because it adds value to the investment decision-making process. This does not disappear. He’s here to stay.

ROBOTS: Historically, women, people of color – especially black people like me – have not been allowed into the industry. And now that we are starting to show up, we are in a situation where we have this huge price pressure. “Reduce your fees!”

Organizing, mobilizing, training other investors, collecting data sets – all this takes people. You need to be able to invest in them.

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

LIBER: Okay, but do you always trust the data you get from the companies themselves – the raw numbers or the way they can selectively account for things?

ROBOTS: We use less of the data that companies provide themselves. The data collected independently by third parties, which verifies them with the practices of public companies, is what we really rely on.

LIBER: Elon Musk would like to be different in terms of the value that ESG adds. How would you try to convince him with 100 words or less?

ROBOTS (laughs): Here’s what I’d say: The reason you’re confused is that you’re the CEO with a problem, and that’s not the way of the future. The path to the future is humans and the planet, and a torn society can do nothing, including electric cars.

DOMININS: It went after my industry, instead of after the index that excluded it. The whole industry didn’t throw it away.

LIBER: Individual investors are faced with many options for choosing ESG. Goldman Sachs and others hope the familiar names will matter. What is the right framing question that people need to ask when buying funds?

ROBOTS: In fact, there are three. The first is, what are your problems? For us, these are racial, sexual, economic and climatic, because these are the places where capitalism derives value unsustainably.

Then how do you measure 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 farthest from power. And this is information that investors are not currently receiving.

LIBER: What is the least obvious example of this third?

ROBOTS: When we went to the Poor Campaign and asked what we should focus on, they made us work with One Fair Wage, which works to remove minimum wages for tips workers.

We created an entire Sustainable Salary Investors campaign and had a collective statement from the investor, which was over half a trillion dollars of investor money, through the signatories, proving that all public companies are breaking the minimum wage.

LIBER: All this seems like a lot of work for the investor. Where is my interactive tool that allows only one of the many funds to come out as my best choice?

DOMININS: I feel that one step is better than not taking a step. I am not completely committed to who is doing a better analysis or an analysis that is consistent with my own analysis. I looked at the so-called strict portfolios that have stocks that I would not invest in my portfolio.

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

DOMININS: I like women-owned companies if you want to start with something!

ROBOTS: Only 1.4% of all US-based assets are managed by companies owned by women or people of color. So you can narrow down your universe right there.

The reason this matters is that doing it the way we always did gave us the world we have now. If we’re going to have a different world – if we’re going to invest in creating more than we really want – we’re going to have to choose a different set of people who haven’t been to the table yet.

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