Over the last few years, the drumbeats have gotten louder by “them” to insist that ESG issues be a focal point for investors. Before we get into our two-sided-coin-look at this concept, it is important first, to understand what ESG really means and the attempts to force this on anyone invested in public companies.
According to Investopedia, ESG, or “environmental, social, and governance (ESG) criteria, is a set of standards for a company’s operations, that investors use to screen potential investments. Environmental criteria consider how a company performs as a steward of nature. Social criteria examine how it manages relationships with employees, suppliers, customers and the communities where it operates. Governance deals with a company’s leadership, executive pay, audits, internal controls and shareholder rights. In theory, there is nothing wrong with any of these concepts. For our clients, who wish to use this in an investment mandate, we are happy to oblige. However, what fascinates us is that no one ever talks about which companies really qualify the distinction of a “high ESG score”, Perhaps for some investors, he or she would rather make up their own minds as to what qualifies as a set of core concepts to define the values mandated behind how to allocate the dollars to be invested in public companies worth affiliating. The entire concept of forcing ESG on the investment community, which the SEC is trying to do on some level, really flies in the face of a free market and a foundational social construct of our Founding Fathers based on the preservation of individual civil liberties. Simply put, this is a case where “one man’s trash is another man’s treasure”.
So, what do we mean by this? Well, it is pretty simple. Every person already has the right to put their money where their mouth is every time he or she acts as a consumer or as an investor. If certain issues have importance, it always has been possible to back that up with dollars. However, what is alarming to us is the overreaching decision by the financial industry, and certain regulators, not only to decide this is something that now needs to be tracked, disclosed and measured, but Big Brother has decided what defines ESG and what defines the risks of investing in companies that do not score high on these newly created “ESG scoring” scales. Maybe we feel this way because as professional investors, we are capable to conduct a deeper level of due diligence than most laypeople. This all boils down to common sense and government involvement to decide the winners and losers (read: 2008 bank bailouts). We firmly believe that investment management should be as customized as possible for our clients. This approach means giving each client what they want either through core holdings or satellite holdings, as appropriate. We are not going to hop on the latest “trend” that everyone jumps onto. We believe ultimately, it will backfire and leave a lot of investors unhappy with subpar performance because they missed out on companies that were deemed by some entity, to be somehow flawed in its existence by harming the environment, making too much money, or are social misfits.
Listen, we could wrap all investors up in bubble wrap to protect them from all the “risks” of investing. After all, any company associated with manufacturing, transportation, research and a host of other activities are risky, right? After all, in those companies lurk the possibility of a factory accident that could “harm the environment” with smoke and fumes, or an automobile defect that could cause a recall of a part and therein case issues with recycling that replacement part. Are these really the types of things to be contemplated? Ultimately, shareholders (read: the general public) will be hurt by all of this as shares of stocks suffer over time. How? The costs of yet another regulatory disclosure and to maintain “high ESG scores” impact the profitability of companies. Perhaps for some, they are willing to invest in mediocre companies as a sign of support of a particular cause or value. That is perfectly ok to do! But, for us, we will stick to finding potential investments with a strong investment thesis that is a clear path to future growth, solid dividends, when applicable, and last but not least, a smart and competent management team.