Socially responsible investing
ESG investing is an aesthetic.
Please yourself, but don't fool yourself.
ESG stands for Environmental, Social, and Governance investing. It is a marketing tool. I approve of it. It makes investors happy and I want people to be happy. But I don't harbor illusions about ESG. It is a feel-good pointless gesture.
In yesterday's blog post I said people who wanted to protect the planet by doing something to reduce use of fossil fuels should buy an electric car powered by a home rooftop electric system. Then, readers should destroy their former gas-powered car. If a person sold or gave it away, it would still be on the road.
It is the same with stocks. Harvard is divesting from fossil fuels. Avoiding those companies is a near-universal part of ESG screens. When Harvard sells its shares they are shifting their ownership to someone else. That changes nothing. At least Harvard might choose to cast its proxy votes for oil company directors who wanted to steer their companies toward alternative fuels. Who knows what the new owners of the stock will do?
"Socially conscious investing" went from a tiny niche with the Calvert Funds in the mid-1980s into a mainstream investment option for 401k providers. Each ESG investment manager addresses slightly different investor concerns: Fossil fuels, defense contractors, tobacco, or alcohol. Investment managers have big positions in Alphabet (i.e. Google), Apple, Amazon, and Microsoft. We all know something to dislike about each of them. Google sucks up advertising dollars and has destroyed newspapers. Apple assembles its phones in Chinese sweatshops and discards toxic waste there. Amazon has destroyed specialty retail stores that gave communities character, and it works their warehouse employees to exhaustion. Microsoft is a monopoly that squashed competitors and now forces consumers to pay renewing fees.
In the financial sector, both Moody's and Standard and Poor's meet the ethical screen and are included in many portfolios. Both companies enabled the financial crisis. The ratings agencies dashed off AAA ratings for pools of junk mortgages, happy to collect the fees for their imprimatur. The AAA rating allowed banks to borrow against them as if they were risk-free. Had either rating agency done their duty to give an honest assessment of quality and risk, banks could not have packaged and sold toxic investments to pension funds, defrauding their customers. Neither could banks have destroyed themselves by carrying on their books junk bonds rated AAA.
In the consumer discretionary sector, Nike is a big ESG component. I like Nike out of local Oregon pride, although I hear their products are made in Asian sweatshops. Oh, well. Home Depot is the single biggest component of that sector in ESG portfolios. I try not to shop at Home Depot personally because the co-founder, Ken Langone, became notable for his campaign contributions and active support for Donald Trump throughout his term of office. I shop elsewhere, even though the Home Depot store is convenient to me. Trump supporters, though, have reason to be unhappy, too. Following the January 6 Capitol riot, Langone told NBC news “Last Wednesday was a disgrace and should never have happened in this country, and if it doesn’t break every American’s heart, something’s wrong, It breaks my heart. I didn’t sign up for that.”
I am left with mixed feelings. Home Depot isn't good, but maybe it isn't all bad--like every other company.
Boeing, the company that makes the passenger jets that connect the world, is a major defense contractor. General Electric, whose medical imaging technology saves lives, is one. Health insurer Humana is another. Even that most innocent of companies, Oshkosh, the creator of young children's clothing, is one, the 15th largest. Aeroweb. Once one looks closely, ethical investing gets complicated.
If a person just looks at the image and ad copy on the prospectus wrapper, being assured that the investments are "ones you can feel good about while aligning your investments with your values," then ESG investments are great. Investors can be comfortable in their ignorance. But the moment one looks into a prospectus to see what companies are in the portfolio one sees nuance and problems. What one is mostly getting is another index fund that is light on oil, tobacco, and aerospace. There is nothing wrong with that. If it pleases a reader to own an "ethical investment," it is harmless to do so. Just skip the details. It will just make you feel you aren't really changing anything, and you aren't.
The way to make a difference in fossil fuels takes sacrifice. Selling something changes nothing. We make a difference by using less.