It was fascinating to see major companies like Coke and Delta jump into Georgia election law politics earlier this year. By taking sides they made many of their customers mad. Why did they do that?
I remember back in the day when people came and stood in bank lobbies to cash checks. To give them something to do, we put in a TV for customers to watch. Somebody put it on Fox News and I quickly got a complaint it was too conservative. So, we put it on CNN. We got complaints it was too liberal. Finally, we settled on CNBC and just tried to keep the politics off the TV.
Today, culture wars, tribalism and a polarizing election have driven people to look for ways to align investment dollars with companies that reflect their values.
For those of us trying to live our lives as good stewards, values-based investing deserves a close look. Just as we want our charitable donations going to causes that reflect our values, it makes sense that our investment dollars also support ethical behavior.
The devil, however, is in the details.
Take the American Conservative Values ETF for example. It was launched just before the November election. The fund is designed to allow those with conservative values to avoid putting their money in companies that undermine those beliefs. However, the ETF managers also recognizes how difficult it is to have a pure ideology and maximize returns. They make this pragmatic statement on their website:
“We understand the importance of performance. Nobody wants to leave money on the table. For that reason, ACVF is not “ideologically pure,” but a balance between performance and advocacy.”
But perhaps the most popular trend has been creation of sustainable investing funds. If your company offers a 401(k) plan, you are likely given an option to invest in sustainable mutual funds. Funds with this tilt are often called ESG funds, for Environmental, Sustainable and Governance. But with Woke roots, we may not take their ratings too seriously as we’ll discuss.
So, what’s a stewardship-oriented investor to do? Here are four considerations:
First, understand the cost of limiting your investment options. By definition, values-oriented funds reduce the universe of eligible securities available for investment. While this may not seem like a big deal, it is.
Consider some remarkable research that came out a few years ago that asked the question if stocks outperform treasury bills. Treasury bills are considered the safest of the safe investments we can make. They usually carry very low yields reflecting the low risk. So, the question sounds rhetorical, of course stocks outperform treasury bills over the long term.
But the author of the research, professor Hendrik Bessembinder, a professor at Arizona State University, found just a few stocks make all the difference in investment performance. Over the 90-year time period he studied, the U.S. stock market’s entire gain, over and above T-bills, can be attributed to less than 4% of stocks. The other 96% of the stock market collectively delivered puny T-bill returns.
Over the life of the study, 25,782 stocks existed and created $32 trillion of value for shareholders. The top 86 stocks accounted for half of that wealth creation. The largest wealth creator? Exxon Mobile. A stock rated as high risk by ESG advocates. What if your fund excludes several of these high performers? The result will be significant underperformance.
My contention—looking long term, excluding a portion of stocks from the investment universe lends validity to those studies that point to underperformance in values-based funds. In addition, the costs associated with studying and selecting the appropriate stocks will be a drag on performance compared to pure low-cost index investing.
Second, we should ask how pure our investing needs to be. If we don’t want our money funding things we don’t believe in, does that mean we must boycott all businesses that act against our beliefs in some way?
We may not like everything Disney corporation stands for. But does that mean we must cancel a Disney+ subscription and quit watching Loki or Toy Story?
Similarly, we may not like everything our taxes go to support. However, I don’t think the governments poor policies justify refusing to pay taxes. Or, consider health insurance. I may not like everything my company’s health insurance pays for, but I don’t think we can reasonably lay a guilt trip on those who chose to participate.
So, when it comes to investing, here’s how I try to navigate the gray areas. First, I’m not going to own a stock that promotes a specific practice I have moral objections to such as gambling. However, if gambling stocks represent a tiny fraction of a percent of a total stock market index, I am not going to waste time agonizing over a moral failure. Only Jesus can take on the sins of the whole world in my theology.
Third, the ESG movement deserves special consideration because of its growing power over the corporate world. If you’ve ever wondered why the corporate world suddenly seems captured by the Woke crowd, I think a lot of it comes from the ESG movement.
Why did Coke and Delta chose sides in Georgia? I suspect they get ESG points for it. You might think Coke would be scored low by the ESG police for producing sugar water that leads to obesity. Or Delta might get downgraded by ESG for burning massive amounts of carbon fuel. But none of that seems to matter much as they receive good ESG ratings. And those points determine whether the company is worthy of ESG funds investing in them.
Occasionally a corporation will stand up to the ESG crowd. I was pleased to see Warren Buffett fight off an ESG proxy proposal this year that would have added needless environmental record keeping burdens to the company.
Other, less confident CEO’s, will acquiesce to whatever earns ESG points. But I don’t see that it creates shareholder or societal value. In some cases, I think it is the opposite.
Fourth, some in the ESG movement seem to embrace Messianic sounding praise for their efforts. A recent Barron’s article attacked the traditional diversification theories of finance. It went on to shower ESG with platitudes of how the movement is lowering the systemic risk in the real world.
Really? Perhaps it’s just symbolism over substance. The ratings of ESG companies are susceptible to fooling investors. Apparently, the rankings don’t consider materiality. Does that lower the systemic risk in our world somehow? I take it all with a grain of salt
As a stewardship-oriented investor, I think we should try to align our money with our values as much as reasonably possible. SMWP does not recommend any particular investment, but I would proceed with a lot more due diligence than an ESG rating before investing.
I would love to know how you navigate this complex area of integrating values with investments!
Joe Kesler
As a consumer, I boycott any company that tells me how to think and feel…my index fund selections focus on results and not some bogus ideology on being woke.
Thanks for sharing your approach Mik.
Inspire has some great Christian ETFs. Yes, they have high expense ratios, but they put some of that money to work for charitable causes and it takes much of the burden off me when it comes to diversifying in a responsible way. I am 100% against owning part of a company that profits from the abortion industry or weapons sales to dubious customers. That is why I do not own any broad ETFs.
Anecdotally, my financial role model is a man who started investing his entire annual sales bonus at age 29 until he retired a wealthy man at 52 (he has worked tirelessly the past 20 years for his church pro bono). He has only ever owned individual stocks of companies he ethically agrees with.
Good thoughts Thomas. I tried to write this post in a way that makes the reader think about how their investing and values connect. I think most don’t try to connect those dots in their life. You have clearly thought about it and done a good job counting the cost of your approach in light of your core beliefs.
I think if the culture trends more secular it’s going to be more challenging to think about where we spend our money and invest it consistent with values. I think there are a number of approaches to this question and appreciate the views of those who don’t violate their conscience, but also hold a charitable view of others who might take a different path. I sense this in your approach. Thanks for sharing. Sounds like you have a great role model to follow!