The rush to ESG, with or without Elon Musk

Every time the stock market falls, investors are likely to reconsider almost everything.

The current gut check comes at a time in the development of the investment industry when, according to Morningstar Direct, assets in so-called ESG funds increased by 38 percent last year to $2.7 trillion by the end of March. Experts overlay all kinds of rules and filters on the investments they select, using climate, diversity or other data to create over 6,000 funds worldwide.

There’s a price to awareness: Funds often have high fees, which can erode returns if the investments don’t outperform the alternatives you reject. And there’s quite a bit of confusion about what the term ESG – short for Environmental, Social and Governance – means in practice.

That can lead to episodes like one last month, when Elon Musk branded the entire industry a “scam” after S&P Global had the audacity to remove Tesla from an ESG index. S&P did so in part due to allegations of racial discrimination and other abuses against workers.

Meanwhile, the Securities and Exchange Commission is desperate to catch up, scrutinizing Goldman Sachs and other big banks and questioning whether some ESG labels are stuck on funds that may not deserve to be appropriating investors’ wealth.

To help everyday investors understand this, I reached out to two professionals who have spent some time reviewing wannabe ESG investing.

The first is Amy Domini, 72, the Founder and Chair of Domini Impact Investments and a pioneer in ESG. The second is Rachel Robasciotti, 43, the founder and CEO of Adasina Social Capital, which bills itself as an “investment and financial activism” firm.

Here’s what they had to say.

RON DEAR: What is the most accurate definition of ESG today and how has it changed?

AMY DOMINI: Before we start, is this the preferred vocabulary? It was “ethical investing” when I started, but I’ve lost so many vocabulary battles in my life.

I see it as a more robust set of key data points upon which an investment adviser can make a decision.

And I see it as fulfilling a duty of loyalty. Assets are not managed in the best interests of the beneficiaries when they are actually gasping for breath or life at the end of their wealth accumulation is too dangerous. So I see it as a means to an end, and that goal is a planet that’s livable – and a life worth living. And I see it as a strategy that explicitly recognizes these investors to play a role in bringing those outcomes to the world.

RATHER: Rachel, you were familiar with Amy’s funds. Did you come to a different conclusion?

RACHEL ROBASCIOTTI: We call our work Social Justice Investing. It is the deep integration of four domains: race, gender, economic and climate justice.

RATHER: The definition of justice seems messy these days. On the one hand, some investors don’t want to invest in gun manufacturers. On the other hand, many of them would 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.

RATHER: Wait, so the government should be producing guns?

DOMINI: Capitalism is great at distributing goods and services widely and cheaply. Weapons should not be distributed widely and cheaply.

RATHER: Academics have been talking for years that so-called active investing is a bad idea — that it’s just too difficult to actively pick stocks that outperform others over the long term. Doesn’t ESG investing violate these principles?

ROBASCIOTTI: To do a good job of investing in social equity, you need to actively engage with these issues and be alert when a company’s behavior changes in ways that have a real, material impact on its future.

DOMINI: Have a seat. You had arguably a strong story for empowering small business owners, a strong economic justice theme to get excited about. As they became more and more of a blockchain company – to the point where they changed their name – this initially exciting thesis became less and less present.

RATHER: Perhaps it is then better for curious investors to play with the word active and think of ESG as activist investing. If someone is paying the higher-than-average fees — or at least the higher-than-average index fund fees that companies like yours charge — it shouldn’t just be about quietly moving money from one public company to another in a way that might not have much of an impact . Activists push. They make noise.

DOMINI: We wrote to 150 companies in Japan and pointed out that there are two genders and their boards do not reflect this fact. Japan doesn’t have solid shareholder resolution capabilities, but that doesn’t mean you can’t have activism.

RATHER: We are now in a bear market. This is often a time when people try to cut costs in their investment portfolios. There’s a long history of hand-wringing in the investment industry that your money doesn’t come cheap. Do you lose in such market conditions?

DOMINI: They now have ESG products at Vanguard, Fidelity, TIAA. They all do it because it adds value to the investment decision-making process. This won’t go away. It’s here to stay.

ROBASCIOTTI: Historically, women of color — especially black people like me — weren’t allowed in the industry. And now that we’re starting to show up, we’re in a situation where we have this tremendous price pressure. “Lower your fees!”

Organizing, mobilizing, enlightening other investors, compiling datasets – all of this needs 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 times with cheap ESG, you could hit a wall of data and quit. And what we’ve done is tear down the data wall.

RATHER: OK, but do you always trust the data you get from the companies themselves – the raw numbers or how they might be selectively counting things?

ROBASCIOTTI: We use less data that companies provide themselves. Data independently collected by third parties who verify it against public company practices is what we really rely on.

RATHER: Elon Musk would argue about the added value of ESG. How would you try to convince him in 100 words or less?

ROBASCIOTTI (chuckles): Here’s what I’d say: The reason you’re confused is because you’re a single-topic CEO, and that’s not the way of the future. The way of the future is people and planet, and a broken society can do nothing more, including electric cars.

DOMINI: He followed my line of work instead of following the index that excluded him. The whole industry didn’t kick him out.

RATHER: Individual investors face numerous ESG decisions. Goldman Sachs and others are hoping big names will play a part. What is the right framing question for individuals to ask when shopping for finds?

ROBASCIOTTI: Actually there are three. The first is what are your problems? For us, these are race, gender, economy and climate, because these are the places where capitalism unsustainably extracts value.

Then how do you measure it? And the most important question is without a doubt, who decides what counts? Go to the people who are most affected and ask them what is important because they are closest to the problem and often furthest from power. And that’s information investors don’t get right now.

RATHER: What is the most non-obvious example of this third?

ROBASCIOTTI: When we went to the Poor People’s Campaign and asked what to focus on, they led us to working with One Fair Wage, which is working to eliminate sub-minimum wages for tip workers.

We launched an entire Living Wage Investors campaign and issued a collective investor statement through the signatories representing over half a trillion dollars in investor funds to advocate for all public companies to end subminimum wages.

RATHER: It all feels like a lot of work for the investor. Where’s my interactive tool that can pinpoint just one of the many funds as my top pick?

DOMINI: I feel like taking a step is better than not taking a step. I’m not entirely fixated on who does a better analysis or an analysis that agrees with my own analysis. I’ve looked at so-called strict portfolios, which contain stocks that I wouldn’t add to my portfolio.

RATHER: So this analysis paralysis is my problem – isn’t that the industry’s problem?

DOMINI: I like women run 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 narrow your universe right there.

The reason this matters is that if we do it the way we always have, it gave us the world we have now. If we want a different world – if we want to invest in making more of what we want – we have to select a different group of people who haven’t been at the table before.

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