What is ESG? I find myself asking that question pretty frequently these days, because, quite frankly I thought I knew the answer. Hell, I thought Ray Charles could see what ESG or environmental, social, governance was.
That is until Tesla was kicked out of Standard & Poor (S&P) ESG Index, after observing Tesla’s “lack of a low carbon strategy”, “codes of business conduct”, multiple allegations of racism, and poor handling of a National Highway Safety Administration investigation.
I mean, Tesla makes electric vehicles, right? By definition that should be ESG, right?
Wrong.
Wrong.
And wrong again.
In reading about Tesla, I realized I had a knowledge gap. So I decided to close it by starting at the beginning… aka, how did ESG become a thing?
According to the MSCI website, “the practice of ESG investing began in the 1960s as socially responsible investing, with investors excluding stocks or entire industries from their portfolios based on business activities such as tobacco production or involvement in the South African apartheid regime.” Although there is evidence that some form of ESG can be traced to the “1800s, when the Methodist Church urged its members to restrict investments in controversial companies, particularly alcohol, tobacco, weapons, and gambling companies.”
Socially responsible investing (SRI) is thought to be the earliest form of ESG investing. Personally, I believe we should always be socially responsible in what we invest in. Particularly, I think it’s important to invest in areas where you have high conviction, you actually believe in the company and the company is aligned with your personal beliefs.
However my personal beliefs right or wrong, may not necessarily match up with another person, so how do I use ESG in making an investment decision?
The managing director of the ESG research for MSCI, defines ESG as “the consideration of environmental, social and governance factors alongside financial factors in the investment decision-making process.” However I feel like this definition is highly subjective.
If you ask investment professionals this same question, you’ll find it’s a highly controversial topic and you’re likely to not get a concrete well defined answered.
Believe me, I tried asking and got nowhere. You can see evidence of my attempts here:
Let’s just say that question fired a few people up and honestly didn’t help my educational pursuit one bit.
However it didn’t deter me from wanting to learn more about ESG? Specifically how do I measure the “ESG-ness” of a company?
Well, it turns out there are a number of different ESG rating methodologies, with differing opinions on what factors measure ESG for a company.
Kevin Prall, CFA wrote a blog post for the CFA Institute looking at this very subject and came to the conclusion that “disparities between today’s ESG ratings limit their usefulness in extracting meaningful insights about a company’s financial resiliency and long-term value.”
In case you’re not tracking, that is a fancy way of saying, it’s difficult to suggest how to use an ESG score for investing.'
That same post also shows the correlations of the scores between the ratings agencies (aka did they agree on the ESG-ness of a company).
All in all, I am left confused. ESG to me seems like a great thing. We want companies to be responsible with our money as investors while making a positive impact on society and the environment. As an investor I want to provide capital to things that I personally believe in and not fund bad actors.
At this time, there’s no great way to measure that on the surface.
MSCI has published their ESG scoring methodology and from what I can tell it requires A LOT OF DATA.
On the surface this looks to be a manpower heavy process to measure something that is subjective.
Again, I am a fan of ESG but it’s difficult to ascertain how these scores were obtained based upon qualitative data. This is shown better in what the MSCI identifies as its “35 Key Issues” which are used to determined the ESG rating.
The one conclusion I can come to after reviewing the MSCI methodology is that ESG is a data heavy subjective process that provides a rating of subjective importance.
Now with that said, I do believe that ESG specifically SRI is of the utmost importance.
It’s possible that ESG will never have a standard definition. As a numbers oriented person, I am not sure how comfortable I am with that. Additionally, ESG is proving to be an expensive style of investing in a low-fee investing environment.
In fact, Planadviser.com, notes that a Morningstar study found a higher asset-weighted average expense ratio for environmental, social and governance (ESG) funds (0.61%) compared with their traditional peers (0.41%).
That 0.20% difference may not seem like much but looks extremely expensive when compared to the 0.03% that is offered in non-ESG Vanguard Exchange Traded Fund (ETF).
So what is ESG? Again, I am not sure.
As a retail investor, the best way to get exposure to anything, is via a low fee diversified index fund of some type. ESG is no different, however i’d argue on the low fee part and add that because of fund overlap with non-esg funds, your portfolio may not be as diversified as you think.
Many of the ESG funds are comprised of large cap companies and if you’re already weighted heavily in that area, you may be spending the extra money for little gain.
Lastly, I believe in ESG or SRI, whatever you’d like to call it. However I think it needs a ton of work to justify paying the added fees as a everyday non-professional investor, aka a regular person.
ESG is a weaponized construct used by the globalist cult to break down an existing axiom and replace it with a centralized one. It's all about control of the people. Something you should be dead set against given a number of your talks. You need to take some of that genetic fire and direct it at the Truth of what's unfolding in this space-time else those you are trying to empower from the bottom will simply become the new slave masters of a complete global indoctrination system.