By Morf Morford, Tacoma Daily Index
Many years ago, before we had such words as “political correctness”, “woke” or “cancel culture”, there was a relatively popular (or at least widely discussed) investment strategy called ethical investing. The premise was simple; as any of us dedicates savings in our retirement or personal investments, besides portfolio profit, we should encourage industries and businesses we choose to support and avoid supporting those industries or products we prefer not to be associated with. In short, these funds allowed people to invest in what they believed in.
To most of us in the 2020s, that might seem, even in our passionately opinionated times, a strange, even suspect investment strategy.
But, in far too many ways to count, those were far simpler times.
As you might (or might not) guess, this movement was initiated and promoted by faith communities who were convinced that we could (or should) make a difference in our communities (and larger economy) and set (or at least aspire to) a moral standard that expressed our values. Whether profitable or not, the intention was to encourage companies to act responsibly, even morally.
But that was then…
At first, the companies that were specified as “ethical” investments were those that avoided tobacco and alcohol products. Over time investment options expanded to those who treated their workers fairly or those companies with more environmentally “sustainable” practices – with investment opportunities eventually moving into “fair trade” or even apartheid.
These investment vehicles eventually became knows as ESG. Environmental, social, and governance (ESG) investing refers to a set of standards for a company’s behavior used by socially conscious investors to screen potential investments.
ESG investors intend to encourage or even ensure that the companies they fund are responsible stewards of the environment, good corporate citizens, and are led by accountable managers.
To put it mildly, there was money to be made. According to a USA industry report, investors held $17.1 trillion in assets chosen according to ESG principles in 2020, up from $12 trillion just two years earlier.
You might not think that, in the 2020s, demanding that corporations avoid near-slavery (including child labor) and environmentally destructive activities or support government or corporate corruption would be controversial. But if you pay attention to some recent news stories, every one of those are still burning issues.
The “E” stands for environmental. Environmental issues may include corporate climate policies, energy use, waste, pollution, natural resource conservation, and treatment of animals. ESG might also take into consideration any environmental risks a company might face and how the company is managing those risks.
The “S” is short for social. Social aspects look at the company’s relationships with internal and external stakeholders. These could be investors, employees and communities impacted by the business.
Some questions to ask are; Does the company hold suppliers/vendors and subcontractors to its own standards? Does the company donate a percentage of profits to the local community or encourage employees to perform local volunteer work? Do workplace conditions take into account employees’ health and safety?
The “G” stands for governance. Who controls the reach and decisions of the company? What are the standards that ensure a company uses accurate and transparent accounting methods, pursues integrity and diversity in selecting its leadership, and is accountable to shareholders?
As I mentioned before, most of us would never have imagined a time when ethics or treating workers equitably would be questionable. But in 2023 everything is suspect; several state legislatures are considering bans on any ESG-based investment criteria for public funds, and several states have already crafted laws or other regulations restricting or banning ESG-based investment policies for state and local investments.
Honesty pays – eventually
Hucksters and scammers make big profits, and even bigger promises, but long term investors know that integrity pays better than the greatest schemes.
In the meantime, ESG related profits may be temporarily elusive, but that might be an essential trade-off for ultimate (and not always tangible) value in societal and environmental benefits.
The SEC was designed and instituted to serve to protect investors, and a growing segment of the investor community is demanding to understand the social and environmental impacts of their investments.
There is a philosophical/political conflict between representing the need of investors to get quality disclosures from public companies versus the perception that ESG is frivolous (or “woke” and represents issues that are outside of what the financial industry should oversee.
Everything in 2023 is, apparently, a prop or flash point in our ever present culture wars.
Investing in what we believe in seems like an obvious strategy, but for some of us apparently, investing in the future – our own or that of the larger world is not as simple and clear as it once seemed to be.