ESG. The latest acronym to fall victim to the divisive politics that currently envelopes the United States. Is the political animosity justified? No. Does ESG have problems? Most definitely! So, how do you, as a financial advisor, tiptoe through the minefield that has become so affectionately labeled, “woke investing?”
How We Got Here
The genesis of the anti-ESG movement begins, not surprisingly, with fossil fuel companies and their fear of being replaced by cleaner and less harmful alternatives. According to a report from InfluenceMap, that fear of portfolio divestment began with Alliance Resource Partners, the second largest coal producer in the eastern United States, along with its industry group, the West Virginia Coal Association.
Together, they drafted a bill prohibiting the state retirement system from investing in the funds of companies that divested from fossil fuels. They call it “energy discrimination.” I call it fiduciary duty and due diligence to transition investment portfolios to take advantage of the next economy.
It’s highly likely you’re reading this article right now on your smartphone, tablet or computer. You no longer use a rotary phone (if you even know what that is) to make a call. And your computer no longer takes up enough space to fill a warehouse. Every major automaker is transitioning its fleet from internal combustion engines to electric vehicles.
The point is that technology and innovation advance us forward, and those industries that resist and don’t evolve are left behind. Such is the case with coal and other fossil fuels. Their only recourse is to lobby lawmakers to help save their dying businesses – those same lawmakers who have failed to help prepare their state’s economy for the 21st century.
What This Means for Clients
With all of this in mind, how do you address the newspaper headlines and political rhetoric surrounding ESG and sustainable investing? Quite simply: you stick to the facts. Anti-ESG rhetoric is based on emotion, its intent being to motivate a political base. But there’s no real evidence to support their thesis, one aspect of which is that responsible investments underperform their benchmarks, which is simply not true. According to Morningstar, “sustainable investing generated returns similar to those of the overall market in 2022”.
ESG is simply a group of metrics related to a company’s environmental, social and governance risks and performance. And while the industry needs to create some standardization along these lines, the data is still valuable. As fiduciaries, it's our responsibility to know as much information as we can about a potential investment—from traditional fundamental data to the increasing material risks associated with climate change, equity, and corporate governance. Clients need to know we are taking a holistic view of their investment portfolios.
Sustainable investing, which is a step beyond simple ESG investing, focuses on positive solutions to solve our biggest problems, from resource scarcity to climate change to resilience. Most retail clients who are interested in responsible investing prefer to have their funds invested in solutions instead of “less bad” ESG portfolios. Being able to communicate the differences between these two styles and the advantages of investing in this next economy is vital because, ultimately, sustainable investing is growth investing. It is investing in innovation to make the world a better place.
When you’re talking with clients about ESG and sustainable investing, remember that it is not political. It is a manufactured issue meant to divide us. Present them with the facts in meaningful ways that will resonate with them. Focus on what brings us together—making the world a better place for our children and grandchildren. Focus on growing their assets so they can have a comfortable retirement and financial peace of mind. Then bring those two concepts together, which is what sustainable investing is all about: picking companies and industries that are going to be leaders in a new, cleaner and more inclusive economy where everybody has an opportunity to flourish.
Peter Krull is Partner and Director, Sustainable Investing, Earth Equity Advisors, a Prime Capital Investment Advisors Company