An ESG score is irrelevant to clueless investors.
Fortunately, that doesn’t matter much anymore, now that ESG standards are proving useful.
Last week, a federal judge struck down a rule in Missouri that limited the ability of fiduciaries to consider ESG policies when giving investment advice.
As reported in The Hill, U.S. District Judge Stephen Bough sided with the Securities Industry and Financial Markets Association. He said that the rules violated the First Amendment, were unconstitutionally vague and were preempted by multiple federal laws.
I would also note that by not considering ESG factors, or as some would call it, an “ESG score,” advisors do their clients a huge disservice. While some want to suggest that ESG is not aligned with a profit focus, nothing could be further from the truth. I actually opined on this last year, noting that ESG factors (environmental, social, and governance), should absolutely be carefully scrutinized in any proper investment analysis.
Take climate change, for instance. Which would fall under the “environmental” part of ESG.
It is generally understood that climate change has resulted in an increase in extreme weather conditions.
Even if you find the consensus on climate change to be unsound, it is undeniable that we are seeing an increase in extreme weather conditions. And these conditions are expected to continue for the foreseeable future.
We’re talking about everything from extreme droughts and heat waves to more frequent and intense flooding conditions and tropical storms.
As an investor, you need to understand how these conditions are going to affect the operations of the industries in which you invest. And there are few industries that can ignore these extreme weather conditions.
Some of the industries that are most affected by the increase in extreme weather events include …
- Agriculture
- Energy
- Insurance
- Food production
- Construction
- Commercial Fishing
- Water infrastructure
Truth is, any retirement fund that hasn’t already considered this risk factor isn’t serious about creating and protecting wealth for its clients. And none of these funds should need approval from the government to integrate this risk factor into their analyses, either.
Let’s also consider the “governance” part of ESG, which includes things like transparency, leadership accountability and anti-bribery and corruption indicators. All valid components of any investment analysis that, left unchecked could result in severe losses and financial damages.
Consider the Volkswagen emissions tests scandal. That ended up costing the car maker more than $20 billion in fines. It also knocked more than $100 billion of its market cap.
Or WeWork, where there was no leadership accountability or oversight.
On a bigger scale, because of lack of oversight, transparency and leadership accountability, consider the damage done by Enron in 2001, which absolutely crushed investors. Or Lehman Brothers in 2008, which actually shook the core of the global economy.
Because this kind of thing would seemingly fall under an “ESG” definition, does that mean we should ignore it because some lawmaker has decided to call it “woke?” In fact, the biggest threat to your wealth today isn’t ESG. It’s lawmakers who want to limit what fiduciaries can say about ESG but do absolutely nothing about the giant Ponzi scheme called Social Security.
Then there’s the “social” part of ESG. Which is also not trivial and should always be an integral factor of proper analysis.
Consider sexual harassment risks, for example, which fall under the “social” part of ESG.
Not to sound crass, but this goes beyond just the cringe element of sexual harassment. There is also a very real economic impact of sexual harassment.
Deloitte did an economic analysis on this back in 2018. It found that sexual harassment results in $2.6 billion in lost productivity. Read that again: $2.6 BILLION!
Then consider the lawsuits, which in some cases can result in tens of millions of dollars in damages. Like the Fox News Roger Ailes sexual harassment lawsuit, which cost 21st Century Fox $20 million.
How could any fiduciary not find it absolutely necessary to investigate potential losses that could stem from corporate cultures that trivialize or even ignore sexual harassment in the workplace?
You don’t need to wave an ESG banner to know that sexual harassment is a risk factor worth serious scrutiny.
An ESG Score is nothing more than an effective tool used by successful investors
Fortunately, the outcry over ESG that we saw over the past couple years seems to be subsiding a bit. In fact, Deutsche Bank analyst Markus Meuller recently told investors that the backlash over ESG is losing steam. He noted that there are plenty of examples to underline the financial sense of filtering portfolios for ESG risks in the current climate. In particular, citing the toll that extreme weather has taken on key crops, and the ripple effects that’s having for some sectors.
Indeed, “anti-ESG” is a great rallying cry for some politicians. But trying to thwart fiduciaries from employing ESG factors in their analyses is proving to be a battle that will deliver more casualties than wins for lawmakers.
To be sure, partisan hacks spawned this ESG backlash. Not actual fiduciaries and economists. They want to create this illusion that by eschewing ESG factors, they’re helping you protect your wealth. But the reality is that if any of these lawmakers had any real interest in that, the first thing they’d do is end the federal income tax.
In any event, I maintain that it’s insanely foolish to not consider ESG factors in your due diligence process. We did this long before the term ESG ever showed up, and we’ll continue to do it going forward. Because this isn’t about being “woke.” It’s just smart investing.
