Is Investing in ESG Stocks the Best Way to Do Good in the World?
Impact investing has been gaining traction lately, especially among Gen Z and Millennial investors. Environmental, social, and governance (ESG) stocks have also become popular with corporate pension fund managers. Is investing in ESG stocks the best way to do good in the world? And does impact investing help us do the best we can for the financial future of our employees?
The U.S. Department of Labor proposed a rule that would block employee retirement plan managers from making ESG investments. The Department objects that ESGs are not necessarily in the best interest of investors. However, the new Administration is looking to reverse course, particularly in light of its emphasis on social agendas, such as global warming and equity.
An impact investing strategy may not be the best for our employees. But is it the best way to do good in the world?
How do we Know if Our ESG Investment Strategy is Achieving its Goals?
An article in the Canadian press last month written by Caitlin Rose Morgante debates the concept of “good capitalism” and “bad capitalism.” The debate is relevant to investors looking at ESG stocks. According to a Morgan Stanley report, more than $22.8 trillion in global investments is going toward sustainable investments. The report reveals that 84% of investors are “actively considering” adding socially conscious investing to their portfolio.
Morgante, a research associate at Frontier Center for Public Policy, says many ESG paradigm problems exist. Impact investing seeks to simplify and capitalize on the social agenda of the day. There’s no way to evaluate a company’s policies and goals.
A Forbes Advisor article points out the difficulty of determining if a company meets the socially conscious criteria. There are no reporting requirements, no universally-accepted ESG metrics, and no universal standard for measuring performance.
Are There ESG criteria?
Investopedia defines ESG criteria in the following way:
· Environmental: the company’s performance as a steward of nature
· Social: how the company manages its relationships with customers, communities, suppliers, and employees
· Governance: executive pay, audits, internal controls, leadership, and shareholder rights
Morgante suggests that ESG promos rely on storytelling rather than presenting measurable and objective facts. For this reason, impact investing has become popular among Gen Z and millennials.
But how knowledgeable is anyone about ESG funds? Kenneth Nuttal, an NYC financial planner, believes most people don’t know what ESG means. He says they may understand the “E” –environmental, but have little information about the equation’s governance and social part.
The Effective Altruism Model Provides a Better Paradigm for Doing Good in the World
Caitlin Rose Morgante suggests that investors who want to do good should look instead to effective altruism. “While ESG corrupts business by entangling it with emotions and non-profit-related metrics, effective altruism applies economic theory and business analysis to charitable organizations.” She points to GiveWell as an example.
GiveWell is a non-profit research organization that evaluates and rates charities. It utilizes four primary criteria to develop a list of recommended NGOs:
· Evidence of effectiveness
· Cost-effectiveness
· What will additional funds enable?
· Transparency
GiveWell researchers go a step further and answer these questions before recommending that you donate:
· what will the donation allow to happen that wouldn’t have happened otherwise
· will the gift change people’s lives for the better
· will it accomplish a large amount of good relative to other options
Conclusion
The debate over ESG stocks will continue to play itself out in the financial press and markets. However, I suggest that we should employ the rigors of effective altruism when making charitable decisions. A donation is an investment in the charitable organization’s sustainability and in the lives of the people it serves. Effective altruism NGOs, such as GiveWell, provide us with provable metrics to determine if our gift will change people’s lives for the better.
