The thinking is that you can’t make smart and informed investment decisions without understanding how companies address issues like equity, diversity and inclusion in the workplace, women’s access to reproductive health care, and, of course, climate change. That’s especially true for “fiduciaries,” those charged with making prudent decisions for others.
Fossil fuel companies like Exxon and Chevron, for example, have grown rich as global energy supplies were disrupted in response to Russia’s invasion of Ukraine. While the S&P 500 fell more than 18 percent in 2022, energy was the only sector up, with a total return of almost 67 percent, with dividends.
For investors holding these companies in their portfolios, energy was a bright spot. I invest with broad, low-cost index funds that have the entire market. Therefore, he owned fractional shares of these companies. That was great for my returns.
But does that mean that fossil fuel companies are a good long-term bet in an age of global warming, or that people with a conscience should ignore the damage caused by burning oil, coal, and gas?
Somehow, what economists call “externalities”—in this case, the environmental cost of burning carbon—must be part of a fair analysis of the value of these companies. Market prices are not doing the job.
The role of ESG
That’s where ESG comes into play. “There are many approaches within ESG investing,” said Tim Smith, senior policy adviser and founding staff member of the Interfaith Center for Corporate Responsibility, who was present at the creation of the socially responsible investment movement. “Now it’s a very big tent.”
But what exactly constitutes a modern ESG fund is open to dispute.
A year ago, at the start of the war in Ukraine, I pointed out that some stock market analysts were arguing that in order to combat Russian aggression, the height of social responsibility required investing money in the stocks of companies that make weapons. That seemed absurd to the managers of many ESG funds, who have classically avoided guns above all else.