By Ted Schwartz, CFP®

Well, after 25 years in the investment biz, I thought I would try to distill some of what I have learned so far (for myself and for you). Some has been learned the hard way through trial and error and some has been learned from the help of others without too much pain and suffering on my part. At any rate, I would like to offer some of what I now believe in a series of blogs that will hopefully be of some value to you.

In August of 2019, the Business Roundtable (a group including many of the United States’ largest and most successful corporations) made a significant statement of the mission of corporations going forward. Led by the CEO of Chase Bank, Jamie Damon, the group proclaimed that the mission of companies is to exist to benefit customers, employees, suppliers and communities, not just stockholders. This statement is a seismic shift from the concept that corporations exist to promote shareholder value. Instead of only trying to benefit shareholders, this new mandate means that corporations need to benefit multiple stakeholders including the society at large. Basically, this means they are adopting the viewpoint that concerns about ESG investors (Environment, Social and Governance) should be the concern of every corporation.

I have been an advocate of this idea since beginning in this field. When I started, this area was called SRI (Socially Responsible Investing). It mostly was about excluding certain types of businesses from your portfolio. For instance, you might want to exclude tobacco, weaponry, or heavy polluters from your investment holdings. These investments typically were mutual funds organized around certain beliefs. In addition to the above examples, there were funds organized around union issues, women’s issues, and Catholic, Mennonite, or Islamic religious belief systems. Often, these funds tended to have pretty high expenses for the investor and sometimes questionable performance compared to peer funds.

In the ensuing decades, we have evolved to a far better landscape, with ESG portfolios offering competitive expenses and competitive returns. Companies are now given ESG scores on a wide variety of metrics regarding the environment, diversity, women’s issues, etc. Their combined score is then used to compare their company with other companies, either those in the same business sector or the broad market. So, you can have an area of concern to ESG investors (for example, a carbon producing company) and still say that a company rates highly when compared to their peers. For instance, they may be doing better than others at spending more on green energy research, hiring and promoting women and minorities, etc. Depending on the criteria of the investment or underlying index, such a company might be included in an ESG investment pool.

The field seems to me to offer a legitimate objective-to invest your savings in companies that you approve of and can take pride in. The concept is to do “well” as an investor while doing “good”.  The issue that I believe still makes this area so difficult is that there are so many shades of gray involved. If we go back to Jamie Dimon’s declaration about corporations, there are an awful lot of competing interests. If a corporation is to benefit employees, suppliers, customers, communities, and shareholders, how will it weigh all these conflicting interests and make decisions. While the employees would most certainly like higher salaries, the customers prefer today’s lower prices. Should the employees’ company raise the prices of their products to raise salaries or keep their products more affordable to customers with limited funds? Similarly, some in the community are most interested in job creation while others would prioritize environmental concerns above jobs. There is literally no end to the possible differences of opinion as the what the best course of action is. So, companies have to weigh, balance and ultimately create winners and losers amongst these competing interests. Despite the difficulties, I see this as an improvement to the narrow purpose of only attending to shareholder value.

It is not a simple process and you have to understand the difficulties involved in choosing ESG investments. For instance, one of the exchange traded ESG funds currently has Amazon and Exxon in their top ten holdings. They are using an index that has rated companies by the metrics we described above. As an ESG investor, you might have objections to owning Exxon as a fossil fuel company or you might object to the impact of Amazon on local retailers. These are the types of difficult decisions you face in implementing your ESG portfolio. It is an interesting and challenging process.

There are some other new and exciting ways to invest your money in concert with your values. An example is the area referred to as impact investing. Here, you are taking your money and investing in an area or project that you believe will be beneficial. For instance, you might be investing in an economic project in sub-Saharan Africa that is designed to lift people out of poverty. This is a fascinating area but is often very difficult to access for retail investors. Such investments may take large minimum investments and be restricted to accredited investors with considerable wealth and investment experience.    Over time, I suspect we will see more investments that are “impact investing” become available to retail investors.

My underlying belief is that we are all ESG investors at a certain level. Some people say they don’t care about ESG investments, as they can make charitable contributions to causes from their investments rather than monitoring them during the investment process. I think we all have our limits as to what is an acceptable investment and it is just a question of where we set the limits. I am pretty sure that if I came to you and offered you an investment in something that would outperform the S&P 500 stock index* but would badly injure children, you would probably pass on the idea. So, you have some ESG limits, it is just a question of where you set them. You may be OK with the missions of all of the publicly traded companies or you may choose to not have your money involved with some of these companies. The choice is yours and Capstone is here to help you implement a portfolio that is geared to meet your needs.

*The S&P 500 Stock Index is an unmanaged index of 500 large US Companies and cannot be invested in directly.


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