Is ESG Dead? No, it's Just Getting Started
Gandhi famously remarked: first they ignore you; then they laugh at you; then they fight you; then you win. ESG has entered the fighting stage.
Companies faced with ESG imperatives are whining. Reactionaries realize that ESG management threatens their precious fossil industries. Far right lobbying groups fund campaigns to label ESG as “woke capitalism.” Double digit numbers of state Attorneys General are calling for investment firms to retreat from ESG. It’s amusing to watch the silliness as the clueless struggle to paint the field as counterfeit. Really, though, it’s just stupid. While critics claim that the firms are using money that is not theirs to drive a political agenda, savvy investors reply that they offer ESG investments because it is what their clients want. Blackrock, for example, lost $4 billion when politicians in several southern states forced their state pensions to divest from the company in 2023. But they made $230 billion in new money coming into their funds. Critics are costing themselves money. ESG (formerly CSR, formerly SRI) began when the churches founded it with anti-sin investing. Then politically-minded groups introduced anti-apartheid screening. These early “value investors” expected to make less money, but preferred that their investments make a difference in the world. It came as a surprise to many when Amy Domini showed in the late 90s that her fund had actually outperformed the market over the prior ten years. Since then, it has become common knowledge that investing for impact is just better management. You may not find it worthwhile to avoid stocks in companies that sell alcohol or promote gambling, but unless you are a day-trader, you likely want to divest of companies based on fossil fuels, those that violate human rights, or trade in toxics. As the meta study of more than a thousand studies found, such conscious investing confers real value, is important, and will guide smart investors and increasingly smart companies.
This still seems counter-intuitive to many. For years, fossil fuel companies led the stock market. In the 1980s, for example, seven of the top 10 companies in the Standard and Poor’s 500 Index were oil companies. ExxonMobil and the energy sector broadly significantly underperformed and acted as a drag on the entire index since 2014. Studies now show that the New York Common pension fund LOST $17.5 billion because it continued to hold fossil stocks. However, until the invasion of Ukraine, fossil-free funds consistently outperformed the market, and the odds are excellent that they will again, as the transition away from fossil gains momentum. With the recognition growing that if you own fossil stocks you own climate change, young investors, in particular, want out.
Larry Fink, CEO of the firm attracting most of the right-wing anger, responded that even if it is not just better business, decarbonization is increasingly a part of doing business in a world ever more aware of the climate crisis. At Davos he pointed to growing regulation, especially in the EU, that requires business to cut carbon footprints: "If you do not have a lens towards decarbonisation, you're not going to win one euro of business."
So enjoy the ESG fireworks while they last. But don’t bet the farm on ESG going away any time soon.
Disclosures:
The opinions expressed are those of Change Finance, P.B.C., Investment Team. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Forward looking statements cannot be guaranteed. Material presented has been derived from sources considered to be reliable, but the accuracy and completeness cannot be guaranteed. This material is not financial advice or an offer to sell any product.
The S&P 500® Index is the Standard & Poor's Composite Index and is widely regarded as a single gauge of large cap U.S. equities. It is market cap weighted and includes 500 leading companies, capturing approximately 80% coverage of available market capitalization.
Change Finance, P.B.C., is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about Change Finance, P.B.C., investment advisory services can be found in its Form ADV Part 2, which is available upon request. CF-2302-8.