Self-sustaining? More like self-defeating.
Burton Malkiel, author of “A Random Walk Down Wall Street,” now in its 12th edition and considered a business school staple for its explanation of market (and human) behavior, doesn’t think much of the current environmental, social, and governance (ESG) investing craze.
“Some investors argue that this kind of investing will achieve a “more inclusive capitalism” and can even enhance investment returns,” wrote in The Wall Street Journal on Friday. “But how do you know if your investments will have the desired social impact?”
You don’t, he posited, before criticizing rating agencies, screens, and other measurement and benchmarking techniques now employed to ensure investors are “doing good, while at the same time doing well.”
“Bank of America gets a below-average ESG score from one rating agency and a well-above-average rating from another,” he cited as one example. “These disagreements arise because raters differ on how to measure and weigh ESG attributes. Raters are also influenced by their views of the company as a whole. As a result, there are large differences in individual ESG ratings for Intel, GlaxoSmithKline, Comcast, Pfizer, and Samsung.”
Even if these disparities in ratings are effectively addressed, there’s the question of costs, and how much ESG investors are willing to accept. He referred to an incident at Oxford University as another, very granular, example.
“When a group of Oxford students requested that their college divest all of its oil holdings, the bursar at St. John’s College offered to turn off all the gas heat if the students would support such a proposal,” Malkiel related. “They rejected his offer. Good intentions aren’t credible without an appreciation of the costs.”
Not that he completely rejected the idea of ESG investing, but as in all other areas of the portfolio, be sure to properly diversify.
“Putting all your investment portfolio into ESG funds is neither prudent nor virtuous,” he concluded. “The core of every investment portfolio should consist of low-cost, broad-based index funds. If you want some of your investments to go into funds with particular mandates such as renewable energy, do this as an add-on to your core portfolio. But don’t be misled by marketing claims. It isn’t easy to do well by doing good, and ESG funds may accomplish neither objective.”
The DOL’s stance
In June, the Department of Labor said ERISA plan fiduciaries may not invest in environmental, social, and governance (ESG) vehicles when an underlying investment strategy decreases return or increases risk to achieve non-financial objectives.
“Private employer-sponsored retirement plans are not vehicles for furthering social goals or policy objectives that are not in the financial interest of the plan,” Secretary of Labor Eugene Scalia said at the time. “Rather, ERISA plans should be managed with [an] unwavering focus on a single, very important social goal: providing for the retirement security of American workers.”