This is the second installment of a three-part commentary on ESG investing. The first installment, "The USA Should Clarify the ‘E’ in ‘ESG’ and Use Carbon Standards to Our Advantage," was published on May 25.
After that statement in the illustration, Lewis Carroll went on to write:
“The question is,” said Alice, “whether you can make words mean so many different things.
"The question is,” said Humpty Dumpty, “which is to be master—that’s all.”
As we explained in May, when we discussed the "E," or the "environmental" aspect of ESG investing, the standards for "environmental, social, and governance" investing are nebulous, and allow wide interpretation, even sophistry. As Humpty Dumpty goes on to explain to Alice about words, "... adjectives you can do anything with." And the first two of the three words in "environmental, social, and governance" are adjectives, while "governance" is a noun.
As with environmental investing, the indeterminate standards of "social" investing make it a mishmash of values and almost entirely subjective, at least for right now.
Since it is subjective, social investing has, for some, taken on a decidedly Left-leaning political agenda. BlackRock CEO Larry Fink, a person long associated with Democratic and Left-leaning political causes, pressured both Walmart and Dick's Sporting Goods to stop selling firearms by saying BlackRock would strip the companies' shares from its ESG exchange-traded funds after the Parkland shootings in 2018.
As BlackRock is the world's largest asset manager, with a reported $10 trillion in assets, Fink is able to bully and "big foot" the portfolio of companies in which BlackRock is invested into his social views. While Fink vehemently insists what he calls "[s]takeholder capitalism is not about politics. It is not a social or ideological agenda. It is not 'woke,'” he lauds political activities by his associates, for example, citing the head of Atlanta's BlackRock office for endorsing hate crimes legislation. (While the hate crimes bill passed, it was not without opposition.) So, it seems Fink's version of "S," his "stakeholder capitalism" is, indeed, at least somewhat about politics, despite his protestations to the contrary. (And Fink's $10 trillion under management allows him to be "which is to be master," in Carroll's words.)
McKinsey, the consulting firm, also endorses a more Left-leaning social investing narrative, invoking the same "diversity and inclusion" buzzwords that are part of the "diversity, equity, inclusion" (DEI) movement and that has given rise to controversy and division of the type described in this report about a Georgia high school currently struggling with the issue. The McKinsey consultants say the
"S, social criteria, addresses the relationships your company has and the reputation it fosters with people and institutions in the communities where you do business. S includes labor relations and diversity and inclusion. Every company operates within a broader, diverse society."
This is not to say that social investing is necessarily a bad thing, only that it has been co-opted and subjugated to some of the same political influences as the rest of our culture.
Most fair-minded people would agree that there should not be inherent discrimination in the workplace and that customers, suppliers, and employees should be dealt with fairly and objectively. But as discussed above, there has been, without doubt, an effort by some to bend social investing toward a defined political and social agenda, primarily that of the left-wing in politics. But, regrettably, some companies have seen social investing as a means of creating what appear to be hiring quotas based on race and gender that are inherently unfair and, likely, unconstitutional or even illegal.
It need not be so.
How Apolitical Is Social Investing?
As with the environmental element of ESG that I discussed in the previous installment of this series, there are objectively useful elements of social investing that can and should benefit investors and add value.
S&P Global (S&PG), the business intelligence firm, for example, is using a more objective set of metrics, with a closer nexus to bottom-line financial results, to advise its clients about social investing risks. For example, S&PG considers things like labor relations, supply chain vulnerabilities, and political and geopolitical matters in key markets and in jurisdictions where suppliers are located. The Boston Consulting Group brings a similar, apolitical, value-added, approach to social investing considerations.
Close monitoring of activities that may seem extraneous to a business, but are nonetheless integral to its success, is essential and makes common sense. Investors should know how robust a company's supply chains are, or whether they are threatened by prospective labor troubles, regulations, or political and geopolitical developments. They should know whether a company has and enforces policies and procedures that ameliorate reputational risk from things like the Foreign Corrupt Practices Act, sexual harassment, discriminatory hiring, insider trading, or ties to associations, governments, or people that would thrust the company into unwanted controversy that could cost sales, resignations, boycotts, or simple damage to a company brand.
We've seen this repeatedly over the years: Subway, for its ties to convicted pedophile Jared Fogle; Starbucks, for its seemingly discriminatory policies; McDonald's, for its CEO violating the company policy on fraternizing; and several other executives for various forms of sexual harassment, misconduct, or violations of policy. Ben & Jerry's ice cream, and its corporate parent, Unilever, have been harmed by the ice cream company's participation in the Leftist, anti-Israel, "Boycott, Divest, Sanction" movement.
But measuring these matters that are extraneous to the core operations of a company is difficult, and quantifying them into a metric that allows comparisons among competing companies in a sector is virtually impossible.
Inside a company, an independent reviewer of the social elements of a company would need to "drill down" into things like records of Human Resources departments, purchasing records and supply chain logistics, marketing, and even senior staff social media and brokerage accounts. Outside a company, the reviewer would need to be well abreast of developments in the company's marketplace, business locations, and supplier locations as they may be affected by government, labor, societal, and other developments unique to their business sector.
Outside consultants could keep companies abreast, at least quarterly, of social, political, regulatory, and geopolitical risks to its markets, suppliers, and supply chains. Within the company, it would seem the "best" that independent ratings agencies of the social element of ESG investment could do is to create an objective ratings scheme, a punch list of criteria with "yes or no" responses as to whether the company complies with the social practices that could affect the business, such as employee screenings, anti-sexual harassment training and enforcement, monitoring stock trades, etc. But the quality of compliance would necessarily be subjective from the view of the evaluator. The subjective nature of the review is not a critical failure (bond ratings agencies have to do it all the time, for example), but investors should know there is no "bright line" when a company calls itself an "ESG" investment.
As with most other investment decisions, in social investing, caveat emptor, or "let the buyer—or, here, the investor—beware." And avoid the sophistry of those who would take you through the looking glass.
J.G. Collins is managing director of the Stuyvesant Square Consultancy, a strategic advisory, market survey, and consulting firm in New York. His writings on economics, trade, politics, and public policy have appeared in Forbes, the New York Post, Crain’s New York Business, The Hill, The American Conservative, and other publications.