The Myth of “Ethical Investing”

If you have been doing your post-Labor Day investment reading, then you have likely been inundated with thousands of words on ESG — or as I like to call it, the Holy Grail of Ethical Investing.

Wait a second, Big Red Car, WTF is ESG?

Ahhh, dear reader, we should get our terms right, should we not?

ESG is — Environmental, Social, and Governance style investing.

[To be clear, some folks use such terms as sustainable investing, responsible investing, impact investing, or socially responsible investing (SRI). Hope that clears things up for y’all.]

Environmental implications

The “E” means environmental and is a measure of how a company stewards its relationship with Mother Nature.

This criterium might focus on a company’s energy usage (renewables?), how much waste it generates, whether it pollutes the sky, the earth, water; how it conserves natural resources, and how it treats the beasts of the world.

Some of the buzzwords include “contaminated land, hazardous waste disposal, toxic emissions, and compliance with government regulations.”

Environmental criteria may include a company’s energy use, waste, pollution, natural resource conservation, and treatment of animals. The criteria can also be used in evaluating any environmental risks a company might face and how the company is managing those risks.

For example, there might be issues related to its ownership of contaminated land, its disposal of hazardous waste, its management of toxic emissions, or its compliance with government environmental regulations.

Companies like Amazon and Microsoft use the “carbon footprint” approach to their energy demands to keep score.

Social implications

Social grades the company’s business relationships with suppliers, employees, the local community, shareholders (there is an Easter Bunny karma at work here), and other stakeholders.

Social imposes a burden for the company to undertake to discipline its vendors/suppliers — do they hold the same values?

Does the company donate a percentage of profits to local causes? BLM?

Does the company support diversity, inclusion, and equity? Does it support LGBQT concerns?

Can employees work from home?

Does the company pay fair wages?

Does the company support policies against sexual misconduct, sexual harassment, and hostile work environment?

What is the company’s health and safety record?

Governance implications

Governance focuses on the actions of the Board of Directors and management of the enterprise and how it conducts its business.

Is the board sufficiently diverse? Women, POCs, veterans, and space aliens?

[This is a small joke intended to relieve the tension around this subject. Only a handful of companies recruit and retain space aliens for their boards of directors. Even the best talent headhunters flail at recruiting space aliens.]

Are the company’s accounts transparent and honest? Does the company engage in any criminal behavior?

Are there any conflicts of interest at the board or management level?

Does the company use company assets and wealth to engage in personal political speech or activity? Cough, cough.

Why is this important, Big Red Car?

Haha, listen to you, skipper. It’s important because professional investors and funds have begun to use these criteria to determine what stocks they will buy and sell.

Obviously, if you are a coal or hard rock mining company, you are not on the list of appropriate ESG investments. Sorry.

Also, nuclear or coal power, private prisons, agricultural biotechnology, tobacco, tar sands, or weapons and firearms — all taboo.

Does this work, Big Red Car?

Well, to put it most charitably, the jury is out on that subject. What is certain is that fund managers can attract investors to their funds if they anoint themselves with ashes and sing the ESG national anthem.

At this stage of the game, the entire ESG thing is “aspirational.” There is no evidence that it works.

Big companies like Atlantic Century offer ESG ETFs like the American Century Sustainable Equity ETF — ticker symbol ESGA.

American Century Sustainable Equity ETF – ESGA

Just for grins, here are the Top Ten Holdings — plenty of familiar names — of ESGA:

The Big Lie

The Big Lie, dear reader, is that owning ESG high aspirant companies has absolutely nothing to do with the company — you are buying shares from another investor, not directly from the company.

You are not funding the company; you are buying the ultimate paper/digital product.

You do, however, get to turn your virtue signal onto high beam. And, for some folks that is good enough.

Bottom line it, Big Red Car, we got lunch plans

You can own Microsoft in a tech ETF like QQQ or you can own MSFT in an ESG socially responsible investing ETF like ESGA, but in both instances, you own MSFT.

Deal with it.

But, hey, what the Hell do I really know anyway? I’m just a Big Red Car.


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