Is it reasonable to choose the stocks of companies that support policies promoting clean air and water, social justice, hiring diversity and increased transparency and disclosure to shareholders?

A growing number of investors are looking for stocks that do good – not just do well. 

Stated another way, some retail investors are demanding that companies in their portfolio reflect their values regarding ecology, morality and a variety of categories that have little relation to returns on money invested.

ESG – an abbreviation for Environmental, Social and Governance

ESG is considered by some on Wall Street, especially among a younger cohort, as an imperative for choosing the stocks of companies that support, for example, policies promoting clean air and water, social justice, hiring diversity and increased transparency and disclosure to shareholders.

Is it possible to adhere to BetterInvesting principles while maintaining ESG principles?

Is it possible to adhere to BetterInvesting principles – which advocate for regular monthly investments, reinvestment of dividends and profits, selection of high-quality and growing companies, as well as portfolio diversification – while maintaining ESG principles?

Some of investing’s most prestigious firms, such as BlackRock, say yes. In fact, the investment industry is currently creating and marketing large numbers of products tailored for ESG investors.

As of 2020, it was claimed that one out of every three dollars under professional management in the United States — $17.1 trillion — was managed in accordance with sustainable investing strategies, according to the US SIF Foundation’s 2020 Report on US Sustainable and Impact Investing Trends. 

US SIF (The Forum for Sustainable and Responsible Investing) identified 836 registered investment companies with ESG assets in 2020, including 718 mutual funds and 94 ETFs.

Finding companies that blend moral and financial principles may be as simple as reviewing stocks owned by ESG-oriented mutual funds and then choosing ones that reflect BetterInvesting principles. Returns from stocks with high ESG ratings may end up being better or worse than a portfolio that ignores ESG considerations. Which might be acceptable to an investor motivated primarily by adherence to ESG.

But wait

Who decides whether and on what basis a company deserves a high or low ESG rating? Who devises the standards? There are a number of different organizations offer ratings.

Furthermore, how do highly rated ESG companies (and funds comprised of such companies) perform from an investment standpoint relative to those with lower ratings? Can companies be trusted to self-report relevant metrics, or should third-party specialists determine them? The answers to these questions are a matter of growing debate.

Today, an increased number of companies are issuing annual “sustainability” reports, which provide details about the economic, environmental and social impacts of their everyday activities. For example, companies that strive to increase their use of renewable energy sources such as solar or wind are judged more “sustainable” than those relying entirely on fossil fuels.

Beyond debates about how ratings are devised and administered are conflicting academic viewpoints about how to properly incentivize the activities of corporations and thus their impact on society. The late Nobel laureate and economist Milton Friedman argued that “bottom line” financial results for a company operating within legal boundaries are the only appropriate and relevant metric for its valuation. Corporate initiatives designed to achieve social goals only dilute and weaken corporate performance, he said.

Friedman’s highly influential views were challenged in the 1970s and 1980s by theorists who asserted that corporations could and should pursue strategies and tactics to attract investors by pursuing goals as varied as ending U.S. intervention in Vietnam and halting apartheid policies in South Africa. The movement to enhance the societal utility of corporate behavior and practices continued in the 2000s, perhaps reflecting the outlook of millennial investors.

It remains far from clear what, if any, relevance adherence to ESG principles has to investment outcomes – or even corporate behavior that aligns with the moral precepts of investors. The former chief investment officer of Sustainable Investing at BlackRock, the largest asset manager in the world with $8.7 trillion in assets as of early 2021 says,

“the financial services industry is duping the American public with its pro-environment, sustainable investing practices. This multitrillion dollar arena of socially conscious investing is being presented as something it's not.”

Tariq Fancy, who left his job at BlackRock in 2019 due to family business obligations, accuses the financial services industry of “greenwashing,” i.e., labeling companies and funds as green to sell them more easily to unsuspecting investors. Initially Fancy thought the industry wasn’t doing harm, even if it wasn’t really doing much good. He’s changed his mind. “I believe we are doing irreversible harm by stalling and greenwashing,” he wrote in USA Today, “and all in the name of profits.”

As with so many questions relating to stocks, the investor seeking to determine the value of ESG investing is advised to dig deeper.

If a company truly minimizes carbon emissions, diversifies its board membership or provides over-and-above transparency, confirming the details may just be a matter of seeking more information on its investor relations website. The resources section (under the research tab) in the powerful BetterInvesting online stock analysis tools provides direct access to company specific information that will help you find companies that meet your investment criteria.

Doron Levin is the Editor of BetterInvesting Magazine.  His lengthy career includes writing about business and economic subjects for The Wall Street Journal, New York Times, Detroit Free Press and Bloomberg. He is the author of two books and an acknowledged expert on the world automotive industry.

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