Sour Grapes; Let’s Talk ESG Regulation

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The argument that ESG investing limits the investable universe, is not matched with returns, and lacks rigor is nothing new. The same arguments arise continually in academic and financial professional publications going back decades, with many of its one-time detractors now supporters. There was a time when Goldman Sachs, BlackRock, and many others were at best on the fence, but are now fully committed.

There isn’t anything new about the sentiment behind the recently announced Labor Department rule that would effectively ban pension-plan administrators from including any kind of ESG product in a default 401(k) plan. The rule would also effectively discourage them from having any ESG options at all. Could this be a desperate attempt by a lame-duck administration to throw a few favors to the oil industry (likely to have the highest level of divestment in the ESG emergence)? The SEC has been making its views known on this topic as well.

As an aside, the oil industry insists that divestments would not be material, so why then would the industry need such a favor?

The criticisms of ESG investing are not entirely without merit. The industry has to confront the lack of transparency around the data that it provides and over time the rigor of the analysis has certainly been improving, as should that of conventional financial analysis which could just as easily be accused of lacking rigor as well. Due diligence has to be done on green bonds with just as much attention to detail as one would apply for a conventional bond.

That said, how can one not see the future in investing in green and socially responsible companies and projects when, as examples, the share price of companies like Exxon and Chevron have been down for more than 5 years, when forces like the Green New Deal will blast open markets for renewables and support new business models that obscure the old economy, and when ESG funds have outperformed the wider market for over 10 years?

Moreover, if markets are moving in new directions and if old assets will lose value, isn’t it absolutely critical to move capital to capture opportunity and avoid risk? Isn’t it, in fact, the industry’s fiduciary duty?

The fiduciary duty to move capital correctly is taken as a given in Europe. Perhaps it’s time that the US follow suit.

Heather Langsner, Head of Impact

We’re LIVE! Thursday, August 13th at 12:00pm ET, join our CIO, Kate Starr with guest appearances from Annie Donovan, COO of LISC and David Sharp, Founder of Up Community Fund who will be discussing trends, problems and solutions in the Community Development space. At its core, community development elevates community-driven outcomes above market-based or government-driven ones. Every community, no matter its wealth and income, desires some level of self-determination over its quality of life. Housing, education, health, recreation, open space, commerce, culture — these elements come into play in every community, but community involvement differs from place to place and movements from the Civil Rights marches to BLM show us what disparities exist between them. We look forward to discussing how experts and organizations have supported a variety of communities looking to make positive change especially for low-income people and families — and how we can invest in them to ensure they become better places to live, work and play. Join us!

Please register here. We look forward to seeing you soon!

S&P Global Market Intelligence analyzed 17 exchange-traded and mutual funds with more than $250 million in assets under management that select stocks for investment based in part on ESG criteria. Of those funds, 12 have lost less value so far this year than the S&P 500. The top performer in the analysis, the Brown Advisory Sustainable Growth Fund had a negative 5.4% price change in the year through market close April 9, compared to a 13.7% decline in the S&P 500.

The idea of IMPACT ETFs is interesting. However, be aware that not everything that is labeled ESG or Impact actually is. Watch out for funds that have as part of their top ten holdings, companies like Amazon, Alphabet, Microsoft, etc. These are crutches for many low carbon funds. Real solution companies look more like Hannon Armstrong Sustainable Infrastructure (HASI) or Marrone Bio Innovations (MBII), or Enphase (ENPH).

Check out “Investing in a Sustainable World: Why Green is the New Color of Money on Wall Street” by Matthew J. Kiernan, PhD for a look into why the smart money is going green.

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