An article in the August 13 Wall Street Journal adds highlights a new twist in the discourse and debate around ESG (Environmental, Social, Governance) investing. ESG is of interest. The investment sector allocates society’s resources, and that allocation bears on the moral tone of a society, both in the projects and firms that garner our resources, and in the considerations we weigh in making our investment choices. The sector might be able to portray Americans’ priorities outside the political sector, if investment can avoid that polarized trench warfare.
Over several decades, a number of investment firms have pursued “ethical investing,” which for the most part meant they screened out firms that their target investors would avoid, such as “sin” businesses like tobacco and gambling. Over the decades the list has expanded, and investors have also sought vehicles to make pro-actively “virtuous” investments. More sectors, such as in oil and arms, have faced wider disfavor, and instruments that promote desirable effects, such as green energy, found growing interest.
The ESG idea has subsumed most of this movement in the past several years. As with the previous “ethical,” “socially responsible,” or “impact” investing labels, the idea still remains a bit generic, and can be applied to a diversity of instruments or ideas. Alternatively, a number of firms now declare a commitment to “stakeholders” as opposed to only shareholders, to imply a commitment to some range of social benefits. “Governance” might refer to a firm’s own internal procedures or to the governments with which it does business.
Questions, and of course opposition, abound. First, there are always firms that distort or misrepresent their doings to claim “ESG” sanction. Ditto for investment funds. Second, there is no generally accepted ESG standard – some funds follow UN principles, some tailor their criteria to attract certain investors. A school of thought favors an old expectation that corporate and investment managers must maximize dollar returns to their investors. As social and political discourse has generated new issues – wider gender identities, stronger awareness of sexual abuse, and a brighter spotlight on racism and its guises – ESG has become associated with a new discourse of “wokeness,” a favorable or derogatory term depending on the person using it.
The WSJ article follows an interview with Vivek Ramaswamy, an investment manager promoting non-ESG funds under rationales that could affect the moral messaging coming out of the investment sector, possibly in new ways.
At one level, Ramaswamy notes that the three biggest fund management firms frequently own enough stock in a firm to impose their preferences on the firm’s policies. Those managers, BlackRock most visibly, advocate a range of ESG measures. As investors in their funds may own the shares technically but do not vote on shareholder issues, any given investor may be “promoting ESG objectives whether you want to or not.” There is little recourse for those who oppose any given objective that the managers support, and investors may feel that they sacrifice monetary returns for the sake of political stances.
Ramaswamy aims to offer a market alternative to these funds. His fund might, for instance, sponsor a corporate resolution that “all hiring … shall be based exclusively on job qualifications, without regard to race, sex, sexual orientation or political belief,” against “DEI“ (Diversity, Equity, Inclusion) policies that point toward hiring from disadvantaged groups. This tactic distinguishes Ramaswamy’s vehicles from the big ESG-conscious firms and his funds offer an alternative to investors who don’t want an ESG component in their managers’ decision processes. Ramaswamy aims to grow his business from that group and present current market leaders with competition based on their ESG stances. It also echoes some political discourse, such as the response to “Black Lives Matter” with “All Lives Matter.”
Ramaswamy’s idea is to be applauded. Choice serves individual freedom, and choice in investment disciplines can paint a moral image from the resource allocation function, in the aggregate of choices made between competing investment disciplines. This particular choice does still suffer, though, from a problem Ramaswamy’s funds share with the large ESG-oriented funds, in a “separation of ownership from ownership.” In both cases, the investor may own a fund’s shares in a moral sense, but the fund owns them in the formal sense, and does the voting on shareholder resolutions. Fund management that exercises corporate governance powers concentrate investors’ policy choices into the managers’ hands. It still subjects an individual’s preferences to whatever rubric or discipline the fund manager chooses, and imposes experts’ models and rationales on the moral expressions available to customers.
Also, sadly, while Ramaswamy’s exclusion of special considerations for certain groups in hiring practices does eliminate certain discriminations, it does still carry a political impetus. The criteria over which he will compete, which “woke” funds promote and his will ignore, are still taken from our political discourse. Of course the issues have meaning outside politics, but politics once broached is not negated by a measure that opposes the first political mover.
The ESG idea remains a tool for collective fund managers, speaking for masses of individuals, and following guidance in disciplines crafted by elites, left and right. To get a non-politicized portrait from the investment sector will require means for many independent investors to choose among many diverse concerns, monetary and otherwise, in their decisions.
This type of configuration could arise out of the Benefit Corporation movement. A Benefit Corporation is chartered with more than one obligation to its shareholders, usually one of monetary return and another of specified non-monetary goals. There are still relatively few such firms, and many embody familiar concerns such as climate change. But in a world populated by many firms with diverse objectives, any given investor could build a portfolio not only of firms in different industries as today, but with a mix of social, or environmental, or other objectives. A wide range of choice would allow an individual to tailor investments more to personal taste, and give authentic popular substance to any moral tone projected by society’s investments. Such a configuration is a long way from practical reality, the offers a useful long term image.
Common Conviction 