Every time the stock market falls, investors are likely to reconsider just about everything.
The current scrutiny comes at a point in the evolution of the investment industry when assets in so-called ESG funds surged 38% last year to $2.7 trillion at the end of March, according to Morningstar Direct. Professionals overlay all sorts of rules and screens for the investments they choose, using weather, diversity, or other data to build what are now more than 6,000 funds worldwide.
There’s a cost to awareness: Funds often have high fees that can reduce returns if investments don’t perform better than any alternative you turn down. And there is a bit of confusion about what the term ESG (short for environmental, social and governance) means in practice.
That may lead to episodes like one last month when Elon Musk called the entire industry a “scam,” after S&P Global had the temerity to remove Tesla from an ESG index. S&P did this, he said, in part because of allegations of racial discrimination and other mistreatment of workers.
Meanwhile, the Securities and Exchange Commission is frantically trying to catch up, investigating Goldman Sachs and other big banks and questioning whether some are putting ESG labels on funds that may not deserve them to grab investors’ assets.
To try to help everyday investors understand this, I turned to two professionals who have spent quite a bit of time vetting would-be ESG investors.
The first is Amy Domini, 72, founder and president of Domini Impact Investments and a pioneer in the ESG field. The second is Rachel Robasciotti, 43, founder and CEO of Adasina Social Capital, which describes itself as an “investment and financial activism” firm.
This is what they had to say.
RON LIEBER: What is the most accurate definition of ESG today and how has it changed?
AMY DOMINI: Before we start, is that the preferred vocabulary? When I started, it was “ethical investing,” but I’ve lost so many vocabulary fights in my life.
I see it as a more robust set of material data points from which an investment adviser can make a decision.
And I see it as fulfilling a fiduciary duty. Assets are not managed in the interests of the beneficiaries if, in fact, they cannot breathe or life is too dangerous at the end of their wealth creation. So I see it as a means to an end, and that end is a habitable planet, and lives worth living. And I see it as a strategy that explicitly recognizes that investors they have a role to play in providing these results to the world.
The state of the stock market
The stock market crash this year has been painful. And it remains difficult to predict what awaits us in the future.
LIEBER: Rachel, you knew Amy’s background. Did you come to a different conclusion?
RACHEL ROBASCIOTTI: We call our work “investing in social justice”. It is the deep integration of four areas: racial, gender, economic and climate justice.
LIEBER: Defining justice seems complicated these days. On the one hand, some investors do not want to invest in weapons manufacturers. On the other hand, many of them would very much like to put more weapons in the hands of the Ukrainians.
ROBASCIOTTI: In the world our investors want to live in, the government is responsible for arms and defense, and that is not a private activity.
LIEBER: Wait, so the government should be producing weapons?
DOMAIN: Capitalism is excellent at distributing goods and services widely and cheaply. Weapons should not be distributed widely and cheaply.
LIEBER: Academics have been talking for years about how so-called active investing is a bad idea, that it’s too difficult to actively select stocks that will perform better than others in the long run. Does ESG investing not violate these principles?
ROBASCIOTTI: To do a good job of investing in social justice, you need to be active on those issues and pay attention when a company’s behavior changes in a way that has a real and material impact on its future.
DOMAIN: Take Square. Arguably they had a strong story to empower small business owners, a strong economic justice theme that you could get excited about. As they became more and more of a blockchain company, to the point where they changed their name, that exciting initial thesis became less and less present.
LIEBER: Perhaps curious investors are better off playing with the word “active” and thinking of ESG as activist investing. If someone is going to pay higher-than-average fees, or at least the higher-than-basic index fund fees charged by companies like yours, it shouldn’t just be to quietly move money from one public company to another. another in a way that may not have much of an impact. Activists apply pressure. They make noise.
DOMAIN: We wrote to 150 companies in Japan, pointing out that there were two genders and that their directories did not reflect that fact. Japan doesn’t have strong shareholder resolution opportunities, but that doesn’t mean it can’t have some activism.
LIEBER: We are now in a bear market. That’s often a time when people are looking to cut costs in their investment portfolios. There is a long history of concern in the investment industry that their funds are not cheap. Do you lose in these types of market conditions?
DOMAIN: You have ESG products now at Vanguard, Fidelity, TIAA. They all do it because it adds value to the investment decision-making process. That doesn’t go away. It is here to stay.
ROBASCIOTTI: Historically, women, people of color, particularly black people like me, were not allowed into the industry. And now that we’re starting to emerge, we’re in a situation where we have this huge price pressure. “Lower your rates!”
Organizing, mobilizing, educating other investors, gathering data sets – all of that requires people. You have to be able to invest in them.
So I would really wonder if anyone is making an impact at a really low price. Many, many, many times with cheap ESG, you could hit a wall of data and stop. And what we’ve done is break down the data wall.
LIEBER: Okay, but do you always trust the data you get from the companies themselves: the raw numbers or the way they might be selectively counting things?
ROBASCIOTTI: We use less of the data that companies provide on their own. Data collected independently by third parties who verify it against the practices of public companies is what we really rely on.
LIEBER: Elon Musk would disagree on the value that ESG adds. How would you try to persuade him in 100 words or less?
ROBASCIOTTI (Laughing): Here’s what I’d say: The reason you’re confused is because you’re a single-issue CEO, and that’s not the way of the future. The way to the future is people and the planet, and a fractured society can do nothing, including electric cars.
DOMAIN: He went after my industry instead of going after the index that excluded it. The entire industry didn’t kick him out.
LIEBER: Individual investors face dozens of ESG options. Goldman Sachs and others hope that household names matter. What is the correct framing question people should ask when buying funds?
ROBASCIOTTI: There are actually three. The first is, what are your problems? For us, those are racial, gender, economic, and climatic, because those are the places where capitalism unsustainably extracts value.
So how are you measuring it? And the most important question, without a shadow of a doubt, is who decides what matters? Go to the people most affected and ask them what is important, because they are the closest to the problem and often the furthest from power. And that is information that investors are not currently receiving.
LIEBER: What is the least obvious example of this third party?
ROBASCIOTTI: When we went to the Poor People’s Campaign and asked what we should focus on, we were taken to work with One Fair Wage, which is working to eliminate sub-minimum wages for tipped workers.
We created an entire “Investors for Living Wages” campaign and had a collective investor statement representing over half a billion dollars of investor money, through the signatories, making the case for all public companies to end wages below the minimum.
LIEBER: All of this feels like a lot of work for the investor. Where is my interactive tool that allows only one of many backgrounds to be my best option?
DOMAIN: I feel that a step is better than not taking a step. I’m not totally obsessed with who does a better analysis, or an analysis that is consistent with my own analysis. I have looked at so-called strict portfolios that have stocks that I would not put in my portfolio.
LIEBER: So this analysis paralysis is my problem, isn’t it the industry’s problem?
DOMAIN: I like women-owned businesses, if you want to start something!
ROBASCIOTTI: Only 1.4 percent of all US-based company assets are managed by companies owned by women or people of color. So you can shrink your universe right there.
The reason that matters is that doing it the way we’ve always done it has given us the world we have now. If we’re going to have a different world, if we’re going to invest in doing more of what we really want, we’re going to have to elect a different group of people who haven’t been to the table yet.