Climate Change is happening because of us. Pollution, deforestation and plastics filling the oceans are all because of us. We absolutely must change how we live our lives and build our societies to take better care of the only place we all can live, Earth. I am NOT a rabid environmentalist, I think Greenpeace and their ilk are ruining the value of true change by being militant. Ideas like this week’s “Green New Deal” out of the US are a disaster waiting to happen. The money does not match the idea and at no point in human history has that ever worked out in the long run.
Now that we have that out in the open, let’s talk about ESG Investing. Environmental. Social. Governance. Three hugely important words that mean so much, have been called different names but three words that also are wildly varying in their interpretation.
True ESG Investing hinges almost entirely on two things. The will of the investior(s) and the will of the company. The will of the investor is growing for companies that show they care about the environment, about all stakeholders and also about the society they operate within. A funny thing is happening because of that; the will of the companies to be more environmentally aware, more socially conscious and to maximize value for ALL stakeholders not just the shareholders is also growing.
Here is the problem with investing with an ESG mindset. It makes great marketing for asset managers and corporations. It makes investing decisions difficult for investors. Why, you ask? Well look at the introductory paragraph above. How much of that do you agree with? I am willing to bet you will find at least one part you disagree with. It doesn’t matter what you disagree with, the fact is we will not be exactly the same in our beliefs
It is this disagreement that makes ESG difficult for investors. If we cannot agree on what constitutes the right ESG factors, how can we make a broad ESG standard that applies across a spectrum of investments? The Asset Managers and the corporations will gladly market on their ESG bonafides. They do it because it is what you demand right now. The problem is that you may not share exactly the same ESG ideals as the corporation or asset manager. You could be vehemently against Oil shipping by pipeline but the ESG manager may invest in a company that makes recycled bolts that are used in the making of a pipeline.
I think ESG Investing cannot work as a broad application. I DO think ESG investing can work much better as an individual application. Invest in what you believe is right. With the technology available and the information available, you could follow your own ESG framework based on your personal beliefs. Corporations will only improve their disclosure around their ESG practices because we are demanding it from them.
Here is my own, personal ESG framework. It is right for me and when I apply it for clients, I am up front about it and how I apply to their portfolios.
- No cigarettes. Cancer sucks and it is a massive drag on our government spending. Side note on this, cannabis is also out for me but companies doing research on the health benefits of CBD are not.
- No guns, bombs or war mongers. This is one of those areas where the overlaps kill so I apply it broadly to companies that have most of their revenue from war.
- Oil and Gas- this is the contentious one for me. I am becoming more inclined to skip heavy oil and oil sands yet continue to invest in natural gas. Pipelines, in my opinion, are the most efficient and safe method to transfer both so they are good.
- Abusers- this is my catch-all category for companies that jack up prices annually, treat workers poorly on a regular basis and corporations that use their business to take advantage of things to no benefit but their own. If you are the only drug maker for a 20 year old leprosy drug and you raise prices 150% a year, you fall into this category.
- Poor Stewards- this one falls under the governance category and is the lesson I learned the hard way.
When you look at your own beliefs, figure out what areas are in the No-Go zone and adjust your allocations to fit that. Do not seek out the cookie-cutter ESG model. You are likely to find that it does not match up with your own beliefs. There is enough information available to allow you to filter out the companies you do not believe match your beliefs. ESG is here to stay but its application is well within your hands to manage to fit your goals AND your beliefs. Now just do it.