Investing can feel complicated and overwhelming. There is so much jargon out there, tax issues and fees to consider, types of investments to figure out…And you don’t want your own investing to make the world a worse place! Today we have a smoking hot discussion about socially conscious investing” (aka ESG investing – environmental, social, governance) which, in the world of personal finance, is currently extremely sexy. Over here at the Boring Newsletter you know we like plain vanilla.
ESG investing very generally means that investors evaluate whether companies do harm to the environment, treat people poorly, or are badly run. There is no common definition of specifically what this means in practice. For now I’ll just call it not investing in “bad stuff.”
Someone says: I don’t own bad companies in my investment portfolio because I don’t want my money to help those companies.
💤My Boring take💤: Nearly all investing by individuals is neutral, neither directly helping nor harming the companies in question.
🔥Hot take #1🔥: If you want to invest in this manner, cool, but do not fool yourself into thinking this is activism or that it impacts the companies in question.
🔥Hot take #2🔥: If you swerve on ESG investing, you are not “part of the problem.”
Here is a stylized description of how a company raises money from selling stock to the public: the company creates new shares of stock and in return gets a bunch of cash. Like this:
This is how it works when the company is creating new shares to sell. If it is the first time this company has sold shares to the public, this is called an initial public offering (IPO). If it is not the first time, this is called a secondary offering.
A company does not create new shares to sell very often. Some companies only do it one time ever. If you are doing regular purchases of stocks in your investment account, you are not transacting with that company! You are buying existing shares of stock from another investor. Like this:
Our mustache-twirling villain isn’t part of it. It’s kind of like buying furniture on Craigslist. The furniture manufacturer got paid the first time someone bought the couch, but after that, it’s just money and a couch changing hands among people. If you hate the company that made that couch, do you hurt them by not buying it off Craigslist from couch-owner #5,122? Eh…. not directly.
If what you want is for the couch maker to stop polluting a river in their manufacturing process, I think you should put all your effort into advocating for regulation, protesting in front of their factory, or engaging in other direct activism. Swerving on owning the stock of BAD STUFF Inc is not like a consumer boycott because it does not impact the cash flowing into the company’s coffers. Well, you say, what if you could get all 5,122 people to say no to that stock at the same time? Wouldn’t that cause the company to take notice? Indeed, then you’d have yourself a movement! If you can do that, then you (and your thousands of comrades) can just stop the pollution directly, no need to mess around with the stock market.
If someone tells me they pursue ESG investing to starve bad companies of funding, I think they may not understand how stocks work. If they pursue ESG investing because they just can’t stand the idea of personally benefitting from an investment in BAD STUFF Inc, I get that.
Does this mean there is nothing investors can do to impact company actions? An academic literature review on this topic finds that “shareholder engagement is an effective mechanism through which investors can trigger reforms that improve the quality of company activities” but also finds that more costly reforms are less likely to be implemented and engagement requests involving large, internationally renowned asset managers are more likely to be successful. The authors conclude that “more fundamental changes also require policies that directly change the viability of economic activities, such as taxes on pollution or minimum standards.”
There is also a decades-long investing approach that considers ESG investing to be a way of evaluating investment risk factors, and studies have found a relationship between better corporate behavior and superior corporate financial performance. There are also professional investors who pursue investments in “good” companies that have might have trouble getting funding otherwise.
Personal finance in the U.S. holds so many challenges for most people, I hate to see people feeling like they need to (or even could) solve systemic problems with their individual investing actions. I see the growing interest in ESG retail investing as primarily another instance of capitalism folding a movement into itself, distracting people with feel-good marketing, and ultimately doing little to actually challenge toxic power structures and practices. It would be good if I am wrong.
p.s. Would you be willing to send me questions you have about taxes? I am working on a summer series about how various aspects of taxes work and why it matters. The curriculum will be even stronger if I make sure it addresses your specific questions, which you can submit anonymously here.