ESG Investing Is Feel-good Social Engineering- ChatGPT guest column

This is a myth based on falsehoods circulated by, of course, large powerful companies who are not ESG in their practices.  To appreciate how false this myth really is it is important to have a basic understanding of what the term means. The following summary was written by ChatGPT using the query "basics of ESG investing:

ESG investing, also known as sustainable or socially responsible investing, is an investment approach that considers environmental, social, and governance factors alongside traditional financial analysis. Here are some basics of ESG investing:

1. Environmental factors: ESG investing considers a company's impact on the environment, including its energy and resource usage, waste and pollution management, and carbon emissions. This information is used to assess a company's sustainability and its ability to address the risks and opportunities related to climate change.

2. Social factors: ESG investing also looks at a company's impact on society, including its treatment of employees, customers, suppliers, and the communities in which it operates. This information is used to assess a company's social responsibility, diversity and inclusion, and the potential social and reputational risks.

3. Governance factors: ESG investing considers a company's corporate governance structure, including its leadership, board composition, and executive pay. This information is used to assess a company's transparency, accountability, and ethical business practices.

4. ESG investment strategies: There are different ESG investment strategies, such as positive screening (investing in companies with strong ESG performance), negative screening (avoiding companies with poor ESG performance), and thematic investing (investing in companies that are aligned with specific environmental or social themes).

5. Performance: ESG investing aims to achieve both financial and non-financial outcomes. Studies have shown that companies with strong ESG performance may have better financial performance and lower risk over the long term. However, there is no guarantee that ESG investing will always outperform traditional investing.

6. ESG data and metrics: ESG investing relies on data and metrics to assess a company's ESG performance. There are different ESG data providers, and each may have their own methodology and ratings. It's important to understand the limitations and biases of ESG data and to use multiple sources of information when making investment decisions.

Not a bad summary in ten seconds! The rest of this is written by ChatGRD [Gary R Duell]. And it took me longer than 10 seconds!

This myth, that ESG investing is "feel-good social engineering", is almost amusing in how ridiculous it is if you stop to think about it. First of all, what's wrong with feeling good? Who doesn't want to feel good? More importantly, what's wrong with feeling good for mentally healthy reasons? Is it nuts to feel bad when the way you invest is causing harm? No. It's entirely appropriate. To the contrary, it is nuts to feel good, or simply not care, when your money is causing harm. ESG investing is portrayed as naïve. But what is genuinely naïve is to ignore all the costs and risks- to yourself and others -associated with how you invest and spend your money.

More importantly, what if ESG investing produced better investment results over the long term? (as I point out here:  https://financialmyths.blogspot.com/2022/08/socially-responsible-investing-will.html)  If you do a search you'll find recurring evidence that:

It has been empirically validated that companies with higher ESG scores tend to do better than companies with lower ESG scores in terms of stock performance and underlying financial metrics.

In fact, here is a search of Dimensional Funds' 149 ETFs ranked by annual returns. Note that the top three are all Sustainability focused.

I found one article in the trade press (Which I can no longer find. They probably took it down.) that made a big deal about how ESG funds had inferior performance vs non-ESG screens. Finally at the end of a convoluted and dense argument, an actual number: 0.8% lower returns. And that was just on negative ESG screens (avoiding bad companies). Positive ESG screens deliver better performance despite ESG funds being more expensive due to the extra work involved. The article ignored that fact.

So don't fall for this myth. It would probably be a good idea to avoid the companies perpetuating it. You can do good while doing well. And worst case, it will only cost you an average of 0.8% lower annual returns.

Best Always,

Gary Duell

Your Constructive Comments are Welcome!

Socially Responsible Investing Is Just A Feel Good Fad

 Like all these blogs the heading is a myth . . .for a number of reasons.

First, the largest asset management firm in the world, with $8.67 trillion on the books, is going all in with ESG investing.  BlackRock's CEO Larry Fink recently wrote a letter to CEOs predicting a "tectonic shift" in the pricing of climate risk into the value of securities.
"From January through November 2020, investors in mutual funds and ETFs invested $288 billion globally in sustainable assets, a 96% increase over the whole of 2019. . . . We know that climate risk is investment risk. But we also believe the climate transition presents a historic investment opportunity."

 But just because Larry Fink is doing it and BlackRock is saying it still doesn't mean ESG isn't a fad.  But there are other trends that do.

The Dept of labor released a new reg 10/202 that intends to limit not only ESG investing in retirement plans but even the mention of it in plan documents!  It also requires plan fiduciaries to choose investments for their participants based solely on financial performance.  Which is insane.  Private prisons are very profitable while also being a scourge on this country.  Fracking for gas is a hugely profitable enterprise with massive externalized costs, from air pollution to sullying groundwater with as yet unknown chemical cocktails.  Both are enjoying short term profitability.  Until their hazards and damage get priced in.  I wonder which industries pushed for that regulation.

So how do you tell who is who?  Isn't greenwashing rampant?  Yes, it is.  But not for long.  Several organizations are growing in power and influence, based on science and increased computing power.

• TCFD- the Task Force on Climate Related Financial Disclosures. The TCFD recommendations on climate-related financial disclosures are widely adoptable and applicable to organizations across sectors and jurisdictions. They are designed to solicit decision-useful, forward-looking information that can be included in mainstream financial filings.
  The recommendations are structured around four thematic areas that represent core elements of how organizations operate: governance, strategy, risk management, and metrics & targets.
•  SASB- Sustainability Accounting Standards Board.  SASB Standards enable businesses around the world to identify, manage and communicate financially-material sustainability information to their investors.
•  CDP- Carbon Disclosure Project, helping persuade companies throughout the world to measure, manage, disclose and ultimately reduce their greenhouse gas emissions. No other organization is gathering this type of corporate climate change data and providing it to the marketplace.
• WDI- The Workforce Disclosure Initiative (WDI) aims to improve corporate transparency and accountability on workforce issues, provide companies and investors with comprehensive and comparable data and help increase the provision of good jobs worldwide.
• FASB- Even the old stodgy Financial Accounting Standards Board informally embraces sustainability reporting.
• Morningstar Sustainalytics - As Europe pulls ahead of us, perhaps multinational corporations will demand the same attention to ESG factors not only in their own organization but in their competitors' as well.  The leveling of the playing field is accelerating.
  

I'm confident these forces will cause the DOL to reverse its corporate-pressured stance on ESG.  A true fiduciary considers all things that can positively and negatively affect its clients.  ESG investing, and consumption, are the future.

Your Constructive Comments are Welcome!

Financial Advisers Keep Their Clients From Procrastinating

Well, all know this isn't true.

But it isn't your fault.  This last year Gary Duell was the procrastinator.  None of the smartest people in the room (not including yours truly) could agree on what was going to happen and what to do about it.

 

Now that a major source of craziness will largely be out of the picture, I'm more comfortable with recommendations for this year:

 

1. Focus on Goals and Cash Flow-  block out the massive media intrusions into your lizard brain, the eat, lust, fight, flight instincts.  Focus on your goals and the plans in place- or that we're working on -to achieve them.  Review your budgets and determine which expenses are in your control and which don't contribute to your goals.  Then eliminate them.
2. Manage Risk- note that I don't say avoid risk, commonly defined as volatility.  As I say repeatedly in my classes, when you're accumulating savings volatility is your friend due to dollar cost averaging.  When you're spending, or on the cusp of spending, your retirement funds then volatility is your enemy.  Manage where and to what degree you allow volatility in your portfolio.  This usually consists of either algorithm-based risk managed ETF and/or third party backed guarantees.
3. Remember Taxes!  Taxes, not healthcare, will be your largest retirement expenditure (on average).  Do you have a plan for future [higher] taxation?
   
4. Be a perpetual student.  Recent studies have shown investors procrastinate 5-10 years before implementing our advice.  That hasn't been my experience.  But I get chagrined if my clients wait 5-10 months!  Especially now.  So never stop listening and learning.
   
5. Seek good returns but follow evidence and ethics.  As data becomes easier and easier to collect and analyze, the bad actors in our economy will be taken out of the game.  It's inevitable.  I am really encouraged by the surge in ESG, SR & Impact investing.  Most of us know without being told that lying, cheating and stealing never work out well in the end.  Companies that foist their costs onto the environment or other people will either evolve or die.  Don't invest in them.
   
6. Take care of your physical, mental and social health.  Without a mind and body it's tough to enjoy anything.  Keeping connected to others, to nature and things outside yourself, your odds are improved!
   

Your Constructive Comments are Welcome!

ESG Funds Are Having a Moment - What It Means for the Modern Investor

CNBC recently published an article articulating the rise of investing in companies that rank highly on environmental, social and and governance (ESG) factors during the COVID-19 outbreak.

Here is the link to the article.

Interestingly enough, these funds were already experiencing big growth before the COVID-19 outbreak, with assets having doubled over the last two years.

In the video below, I articulate my thoughts on this rising trend.

ESG index funds hit $250 billion as US investor role in boom grows — Watch Video

Your Constructive Comments are Welcome!

Karl Marx, Jay-Z & SGI Funds have a lot in common

Usually the title of these posts IS a myth.  But believe this one is true.  Where did I come up with these seemingly completely unrelated topics?  Oddly, they were in the top 10 financial search words last month.

Karl Marx

Karl Marx Monument in Chemnitz

First, what he was not.  Marx was neither Russan nor capital-C Communist, despite having written The Communist Manifesto.  He was a law student from a wealthy Jewish family headed by his attorney father.  I'm guessing his unpopularity with the authorities from whom he fled Germany, France & Belgium was due to his central belief that theology would eventually succumb to philosophy.

A prolific journalist & author, Marx was admirable in his focus on fair & efficient political and social processes (such as his belief in a "constitutional republic with freely elected assemblies".  Like I, he felt wealth and merit needed to be reconnected, without which there would be constant struggle between the economic classes.

Jay-Z

Streetart in Katoomba

The first hip-hop billionaire, Jay-Z (aka Shawn Corey Carter) holds the fascination of millions around the world.  We obsess over our billionaires, that's for sure.  But as perfectly stated in this recent USA Today article, Jay-Z epitomizes what every investor should emulate:

1. Diversify across several sectors and industries.  Jay-Z has his own champagne and congac brands, sports promotions, investments in fashion, Uber & his own Uber-like jet sharing app as well as his own venture capital firm

2. Invest in what you know and love.  This is important because if you don't love your work and your place in the world (e.g. your investments) you probably won't be motivated to put in the effort and commitment necessary to be successful.

3. Commit to your goals.  Not everyone can be a billionaire.  In fact, hardly anyone can be.  I would restate this as "pick goals that inspire your commitment".

Would Marx have liked Jay-Z?  I think so.

ESG

Experiencing heavy in-flows of new capital, ESG funds mirror the growing awareness that sensible and ethical companies are more likely than the liars and cheaters to flourish in the future.  ESG stands for Environmental, Social and Governance & the funds and companies that pass those screens.  

ESG is supposed to be a more evolved, stringent screen than SRI (socially responsible investing) or sustainable investing.  Here's what they mean, in a nutshell:

• Environmental- conserving, protecting and even enhancing local and global natural environments
• Social- treating employees, clients, partners and the communities in which the business operates with respect by following the law, providing quality safe products & services, & contributing to the needs of local communities.
• Governance- operating in a compliant, equitable and transparent manner.

So I find it encouraging that people are interested in these three topics.

 

Your Constructive Comments are Welcome!