ESG Investing Part 2: To Address the Concerns

There’s always a catch. The jeans fit perfectly in the bum but gap at the waist. The pizza has hunks of warm fruit on it (pineapple on pizza is an actual sin). The boy you like plays ‘Wonderwall’ on the guitar unironically. Or, in a not at all personal reference, thinks singing to your face is romantic instead of traumatizing. As they say, (they being someone very old and out of touch), “there ain’t no such thing as free lunch”, or something horrible like that. The idea that things which appear to be free always have some sort of hidden or implicit cost (like GST). That sustainable investing, though very much the thing to-do, has its shortcomings. 

Being “good” is expensive. Like buying a sustainably made shirt, instead of one from H&M. The difference? The use of child sweatshop labor in Myanmar and Cambodia where 13-year-olds get paid as little as 15 cents an hour vs local workers protected by minimum wage laws. Of course, outsourcing makes sense. These large companies are not cruel for cruelty’s sake, they are cruel for money’s sake. Not taking advantage of child labor and not using unrecyclable toxic chemicals all cut into the bottom line ($). 

Imagine two phone companies. The one that behaves abhorrently is able to spend less for the same unit of labor and use cheaper, unrecyclable materials for a perfectly functional and adequate product. The ESG phone company spends capital on sustainable materials and pays workers appropriately. So you, the ubiquitous consumer, go to the store. The two phones look fairly similar except one, the abhorrent company one, is far less expensive. We’re poor, there is a pandemic for god’s sake, we can only afford the shitty company’s phone – and besides, it is the same physical quality as the other. We buy it, go about our day, and the child-abusing, environmentally-destructive company’s share price rises with its revenue.

Basically, if the average consumer can’t afford a more expensive, similarly performing product, the Bad company sells more products – and probably at a better profit margin still. Since profit dictates share price and dividends, ESG companies often trade at lower prices and find it harder to secure similar sales numbers. And the system churns on in a devastatingly catastrophic way. (Don’t you love starting your Monday on such an inspirational note)!?

ESG investing is the person you marry. It shouldn’t even be a long-term partner, it’s common-law or nothing. But the stock market tends to operate like a bunch of Tinder flings (the bottom of the barrel for dating apps, may I add). In the markets, this is called short-termism. More professionally defined as the excessive focus of some corporate leaders, investors, and analysts on quarterly earnings and a lack of attention to long-term value creation. It is a frat boy culture looking for immediate results.

ESG issues do not fit well with short-termism because they tend to benefit financial performance over longer periods, (and demand an equal prioritization of the rights of the future generation). For instance, the poor governance of a large company is more likely to affect the company over the long term than in the next quarter. An ESG company is therefore more likely to have an investor base that’ll keep the share price steady. 

I like to think that ESG investing is female. Patient, nurturing, progressive, and overall superior**. When you invest in something you care about, there is a consensus that investors will stick with the company when the market gets turbulent. Overall, this is positive for long-term investors who need to have a buy and hold strategy. With this, ESG-based investing further promotes healthy investment behavior, as you aren’t panic selling and buying. 

**When studying the psychology of investing differences between men and women, women were found to take a longer-term approach, whereas men don’t leave their investments to grow because they believe they can outperform the market. According to a 2020 report, over a 15-year period, nearly 90% of actively managed investment funds (literal professionals) failed to beat the market. For some inexplicable reason, I think this is genuinely hysterical. 

Do your own ESG research.
Ugh, how annoying. Reading a whole article on ESG investing only to be given the homework of doing your own research. But, ESG investing is deeply personal. Few companies have everything you’re looking for, so you need to decide what’s important to you. 

Consider a big tech company that uses materials that are not biodegradable, ultimately contributing to the world’s pollution and all other environmentally detrimental things. However, this same company is proactive in promoting diversity and holds women in most managerial roles. This may satisfy one investor’s moral compass and leave another entirely unfulfilled. 

Also, the ratings of ESG companies rely on self-reported data (kinda sketch, I acknowledge). And, there is no universal standard on how to specify ESG ratings. As such, you will want to do a bit of your own digging to figure out what suits. Your vibe may be to build a portfolio (how adult – a portfolio!) with the smallest carbon footprint, or rather, just leave out the angry ONG giants. No matter your choices, remember, as all my feminist poli-sci majors know well, the personal is political. So, make good choices. 

The Moral Dilemma.
ESG investing is not intended to be an easy decision. The right thing to do is rarely easy. 

My editor sent me a quote because we’re both sad about bipartisan extremism:  “Democracy is the worst form of government – except for all the others”

In other words, our structures are fucked and disintegrating but are the best we have right now. The same goes for this: ESG investing is the worst form of investing, except for all others. Sacrificing some short-term returns, to me, is a moral necessity when considering social and environmental abuse. Now, I am looking to make all of us suited-up-money-making-kings. A Hil Clinton power suit energy, if you will. If you have minimal disposable income, it is maybe not reasonable to completely invest yourself in only ESG stocks. However, what we are doing with ESG investing is banking on morality. On the idea that if there is enough of a movement, the toxic companies will be forced to further take responsibility for their actions. The idea that as we move towards a sustainable future, ESG companies will thrive and come out ahead, creating a critical mass that shifts the entire corporate movement towards doing the right thing. And in the interim, we are investing in a future that keeps our earth liveable (this is so emotional).

So, to conclude with my unprofessional but thoroughly researched advice: when you go to make your portfolio, ensure that a portion of it holds ESG companies. This allows the investor to support deserving companies, while also making larger profits on other companies. Everything in moderation. A little more water, a little more sleep, a little less red meat. Some money put, where your mouth is. 

To end on a high: Fiona Reynolds, CEO of the United Nations Principles for Responsible Investing says, “Over the last couple of years, [though] the Trump brought a number of policies that made responsible investment more difficult[,] we hope that we can reverse some of those policies and move ahead…
I’ve never felt more certain about the future for sustainability than I do at the moment.”

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