What is ESG Investing? It’s pretty simple, really. ESG stands for environmental, social, and governance. And it’s simply an investment strategy that takes into account those three factors when screening potential investment opportunities. Weirdly, ESG has become a point of contention in political circles. Which I find rather irritating.
While I don’t have any theoretical hang ups about ESG investing, I do have a problem with how it has mutated from non-compulsory investment strategy to political fodder.
When ESG first came on the scene, it was merely an idea. A concept. A voluntary set of standards that could be used or not be used. It was fairly benign.
In fact, there are a number of funds, retirement plans and companies that have employed ESG standards into their investment decisions for decades. They just don’t refer to those standards as ESG. They’re simply basic factors that figure into a scrutinous investment analysis.
Like extreme weather, for instance. Which would represent an environmental risk factor.
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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, I need to understand how these conditions are going to affect the operations of the industries in which I invest.
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
Let’s also consider the “governance” part of ESG. Which again, doesn’t need to be set aside as something special or new. It simply 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.
Take the Volkswagen emissions tests scandal, for instance. This scandal ended up costing the car maker more than $20 billion in fines while losing 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 and leadership accountability, consider the damage done by Enron in 2001. This absolutely crushed investors. Or Lehman Brothers in 2008, which actually shook the core of the global economy.
This isn’t about a cute acronym designed to make investors “feel good.” This is about fiduciary responsibility. Plain and simple.
Then there’s the “social” part of ESG, which again, is 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 and found that sexual harassment results in $2.6 billion in lost productivity. That’s billion, with a “B.”
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. That cost 21st Century Fox $20 million.
As far as I’m concerned, it is absolutely necessary for a fiduciary to investigate potential losses that could stem from corporate cultures that 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.
What is ESG investing? Smart Strategy or Woke Capitalism?
A couple years ago, the Senate voted to overturn a Labor Department decision that would allow retirement plans to consider ESG factors in their investment strategies.
This is what I talk about when I say ESG mutated from non-compulsory investment strategy to political fodder.
Why would a fiduciary need permission from the government to scrutinize basic risk factors? And moreover, why would anyone oppose a fiduciary considering these basic risk factors?
Truth is, the fundamentals of what we now call ESG have always been sound. And opposition to the integration of these factors into financial analysis — just because they’re called ESG — has done little more than instigate bad actors to persuade fiduciaries to second guess risk factors that otherwise wouldn’t have been questioned before.
To be honest, these retirement funds can absolutely consider all of these ESG factors without referring to them as “ESG.” And by doing so, they can avoid being targeted by those who want to equate ESG with what some like to call “woke capitalism.” Which is actually just as stupid as waving the ESG flag.
Doing proper due diligence has nothing to do with “wokeism.” Or whatever they’re calling it these days. And lawmakers declaring that ESG is somehow a mechanism of this “wokeism” is, for lack of a better word, stupid.
They want to claim that the "woke movement" spawned these ESG factors. And that they’re just looking out for their constituents’ financial freedom and independence. But that’s nonsense. Because if that was ever their intention, they would’ve been out in front of the Enron Scandal, the 2008 housing market collapse and recession, and the Madoff Ponzi Scheme. I mean, hell, Bernie Madoff was the former chair of the Nasdaq, and still suckered investors out of $50 billion.
So don’t let these anti-ESG lawmakers make you think that ESG investing is somehow at odds with responsibly growing and protecting your wealth.
As well, don’t believe for a second that government approval of ESG will guarantee that you can grow and protect your wealth in a way that is “socially and economically responsible.” If any institution has zero credibility when it comes to social and economic responsibility, it’s the government.
Here’s the bottom line. These ESG standards already exist without having to set them apart from any other risk factors that are considered in responsible investment analysis. And any ESG-related partisan buffoonery is nothing more than noise designed to distract you from the fact that the last thing you need to build and protect your wealth is government interference.
To a new way of life and a new generation of wealth…
Jeff Siegel
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Jeff is the founder and managing editor of Green Chip Stocks. For more on Jeff, go to his editor’s page.
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