The term “ESG” relating to investing has been in the news more and more lately. I think there is a lot of confusion about this topic. I think this short article will help you put it into perspective. Here is a link to a Nov. 2022 Dimensional Funds Advisors article with their thoughts on ESG investing.
First of all, what is “ESG”. It stands for Environmental, Social and Governance. The idea is that you could decide to invest in a way to honor a passion you have. The most common passion, in my opinion, is “environmental” - meaning you focus your investing in companies that are seen to be more respectful of the environment, or by shunning the companies that you judge to disrespect the environment. In the area of “social”, one could choose companies that honor Christian principles like Pro Life for example.
You have to love people’s passions, and I totally respect people wishing their investing to honor passions they care about deeply! That said, here are a couple ideas to consider.
Diversification is the surest way to excellence in long term returns. An ESG approach is likely to result in lower returns since it means limiting the number of companies stocks in the portfolio. Doing that research/screen also requires more resources adding to cost.
Assigning a “score” to a company as to how well they behave, relative to your passion, is subjective. You could have an executive whose spouse is donating significant sums and energy to a cause that is 100% against yours.
We are grains of sand compared to all the money in the world out there - so what kind of impact can one family have - even a very wealthy one?
While I respect these efforts, my personal belief is that the best way to express your passion is to spend some free time getting directly involved locally in your passion - hands on, politics, education etc. I think you will get your greatest satisfaction that way.
In our opinion the best way to implement an ESG investment approach is to start with a heavily diversified approach, then screen out the companies that most offend your passion. That way you still enjoy significant diversification, while still not owning stocks of the companies that most offend your passion.
We think that these ESG strategies should be limited to individuals and families who have the right to decide how their dollars are invested and their fiduciary duty is only to themselves.
Our view which we have no problem voicing: As organizations, private or public, consider ESG for 401k plans, pension funds, public funds - not owned by one person or family but rather have more than one to as many millions of stakeholders, then ESG must not be implemented since it will offend some portion of the population that it serves - and potentially underperform. This is our reasoned opinion, like it or not, is your decision. These funds “serving many” should use a highly diversified strategy that owns “everything”.
If a more “active strategy” is employed to purchase, or not purchase, select securities, it should be apolitical, acultural and asocial so as to not offend those it is serving.