Any time the stock market falls, investors are likely to rethink almost everything.
According to Morningstar Direct, the current gut scrutiny comes at a time when the so-called ESG funds have grown 38 percent to $ 2.7 trillion by the end of March. Professionals overlay all types of rules and screens for investments they choose, using weather, diversity or other data to build 6,000 funds worldwide now.
There is a cost to consciousness: Funds have a higher fee if investments don’t work out better than any alternatives you reject. And there is little confusion as to what the ESG word is in practice for the environment, social and governance.
That could lead to episodes like Elon Musk calling the entire industry a “scam” last month after Tesla had the guts to remove Tesla from the S&P Global ESG Index. The S&P has done so, in part because of allegations of racial discrimination and misconduct of other workers.
Meanwhile, the Securities and Exchange Commission is trying to investigate Goldman Sachs and other large banks and is questioning whether ESG labels on unqualified funds to acquire investor assets.
To try to help everyday investors understand this, I turned to two professionals who spent a lot of time reviewing ESG investments.
The first is Amy Domini, 72, founder and president of Domini Impact Investment and a pioneer in the field of ESG. The second is Rachel Robassiotti, 43, founder and chief executive of Adasina Social Capital, which describes itself as an “investment and financial activism” firm.
Here’s 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 get started, is that the preferred vocabulary? It was a “moral investment” when I started, but I have lost many vocabulary struggles in my life.
I view it as providing a more robust set of material data points that an investment advisor can make a decision.
And I see it as a fulfillment of a fiduciary obligation. In fact, if they cannot breathe, or if life is too risky at the end of the construction of their wealth, the assets of the beneficiaries cannot be held in the greater interest. So I see it as a means to an end, and that end is a habitable planet – and worth living for. And I see it as a tactic that clearly embraces investors It plays a role in providing these results to the world.
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Liber: Rachel, you were familiar with Amy’s treasures. Have you come to a different conclusion?
Rachel Robaciotti: We call our work “social justice investing.” It is a deep integration of four areas: racial, gender, economic and climate justice.
Liber: Defining justice these days is confusing. On the one hand, some investors do not want to invest in arms manufacturers. On the other hand, many of them want to put more weapons in the hands of Ukrainians.
Robasciotti: Our investors want to live in a world where the government is responsible for arms and defense and it is not private activity.
Liber: Wait, so the government has to produce weapons?
Domini: Capitalism is good at distributing goods and services broadly and cheaply. Weapons should not be distributed widely and cheaply.
Liber: Education experts have been talking for years about the bad idea of so-called active investing – it is very difficult to actively select stocks that perform better than others in the long run. Does the ESG investment violate these principles?
Robasciotti: To do a good job of social justice investing, you need to be active on those issues and pay attention when the company’s behavior changes in a way that has a real, material impact on its future.
Domini: Take the square. They had a sustainability story to empower small-business owners, a strong financial justice theme that you can be excited about. As they became more and more blockchain – to the point where they changed their name, that initial exciting essay became less and less relevant.
Liber: Perhaps curious investors are better off playing with the word “active” and think of ESG as an activist investment. If someone is going to pay a higher fee than the average – or at least pay more than the basic index-funded fees that organizations like you are paying – then it should not be just moving money from a public company. Another in a way that doesn’t affect much. Activists are under pressure. They make noise.
Domini: We have written about 150 companies in Japan, two genders and their boards have suggested that they do not reflect that fact. Japan does not have strong shareholder decision-making opportunities, but that does not mean you cannot have some action.
Liber: We’re in the bear market. This is the time when people are looking to cut costs in their investment portfolios. There is a long history of hand squeezing in the investment industry about the fact that your money is not cheap. Do you miss out on these kinds of market conditions?
Domini: You now have ESG products at Vanguard, Fidelity, TIAA. They are all doing this by adding value to the investment decision making process. It won’t go away. It’s here to stay.
Robasciotti: Historically, women, people of color – especially black people like me – had no opportunity for industry. And now that we are starting to emerge, we are in a situation where we have this enormous price pressure. “Reduce your fees!”
Organizing, equipping, educating other investors, assembling data sets – all of which takes people. You must be able to invest in them.
So I really question if anyone is really making an impact at a lower price. With cheap ESG, many, many, many times, you can stop hitting the data wall. And what we’ve done is break down the data wall.
Liber: Okay, but do you always believe the data you get from companies – raw numbers or the way they selectively count things?
Robasciotti: We use less of the data that companies provide on their own. We really favor data that is independently collected by third parties who are reviewing it with public company practices.
Liber: Elon Musk begs to differ in the value that ESG adds. How do you try to convince him in 100 or fewer words?
Robasciotti (Chuckling): Here’s what I’m saying: The reason you get confused is because you’re the CEO of the same problem and that’s not the way to the future. The path to the future is people and the planet, and a broken society cannot do anything, including electric cars.
Domini: He went after my business instead of going past the index that excluded him. The whole industry did not throw him out.
Liber: Individual investors face ESG option scores. Goldman Sachs and others think familiar names are important. What is the right framework question that individuals should ask when treasure shopping?
Robasciotti: There are actually three. First, what are your problems? For us, they are racial, gender, economic, and climate, because these are places where capitalists can sustainably extract value.
Then, how do you measure it? And the most important question, beyond the shadow of a doubt, is who decides what is important? Go to the most influential people and ask them what’s significant to them, because they are close to the problem and often out of power. And that’s information that investors are not currently getting.
Liber: What is the most obscure example of this third?
Robasciotti: When we went to campaign for the poor and asked what we should focus on, they led us to work with a fair wage, which is working to eliminate the minimum wage of tip workers.
We have created an entire “Investors for Residential Wage” campaign and have a collective investor statement that represents more than half a trillion dollars of investor money through signatures, which end the minimum wage for all public companies.
Liber: For investors, this all sounds like a lot of work. Where is my interactive tool that allows one of the many funds to come out as my best option?
Domini: My feeling is that one step is better than not taking it. I am not completely stuck on who does the best analysis or the analysis that matches my own analysis. I have seen strict portfolios with stocks that are not put in my portfolio.
Liber: So this analysis paralysis is my problem – is it not an industry problem?
Domini: I like women-owned organizations, if you want to start something!
Robasciotti: Only 1.4 percent of all assets in US-based firms are owned by women or people of color. So you can narrow down your universe right there.
The main reason is that doing it the way we always did has given us an existing world. If we are going to have a different world – if we are going to invest in doing what we really want – we will have to choose different people who are not at the table yet.