How do we think of ESG investing in a bear market

Anytime the stock market goes down, investors are likely to rethink just about everything.

The current internal examination comes at a stage in the development of the investment industry when assets in so-called ESG funds rose by 38 percent in the past year, reaching $2.7 trillion by the end of March, According to Morningstar Direct. Professionals overlay all kinds of rules and screens for the investments of their choice, using climate, diversity or other data to create over 6000 funds worldwide.

There is a cost to awareness: money is often high fees It can reduce returns if investments are not better than any alternatives you reject. There is a fair amount of confusion about what the term ESG – short for Environment, Social and Governance – means in practice.

This can lead to episodes like one Last month When Elon Musk called the entire industry a “scam,” after S&P Global dared remove Tesla from the ESG benchmark. S&P did this, He SaidThis is due in part to accusations of racial discrimination and other worker mistreatment.

Meanwhile, the Securities and Exchange Commission is in a frenzy trying to catch upInvestigation Goldman Sachs and other big banks and wonder if some are putting ESG labels on money they might not deserve to grab investors’ assets.

To try to help everyday investors understand this, I turned to a couple of professionals who have spent a considerable amount of time scrutinizing investments represented in ESG.

The first is Amy Domini72, founder and president Domini Impact Investments A pioneer in the field of ESG. The second is Rachel Rubasciotti43-year-old, founder and CEO of Adasina social capitalwhich describes itself as an “investment and financial activity” company.

This is what they had to say.

Ron Lieber: What is the most accurate definition of ESG today, and how has it changed?

Amy Domini: Before we get started, is this my favorite vocabulary? When I started it was an “ethical investment”, but I’ve lost a lot of language battles in my life.

I see it as providing a more robust set of physical data points from which an investment advisor can make a decision.

I consider it the fulfillment of a fiduciary obligation. The assets are not managed for the benefit of the beneficiaries if they cannot breathe or life is too dangerous at the end of their wealth building process. So I see it as a means to an end, and that end is a livable planet – and a life worth living. I see it as a strategy that explicitly recognizes investors It has a role to play in providing these results to the world.

libre: Rachel, I was familiar with Amy’s money. Did you come to a different conclusion?

Rachel Rubasciotti: We call our work “Investing in Social Justice”. It is the deep integration of four areas: race, gender, economics and climate justice.

libre: The definition of justice seems messy these days. On the other hand, some investors do not want to invest in arms manufacturers. On the other hand, many of them would like to put more weapons in the hands of the Ukrainians.

Robchioti: In the world our investors want to live in, the government is responsible for arms and defense, and this is not a private business.

libre: Wait, so the government should produce weapons?

Domini: Capitalism is great at distributing goods and services widely and cheaply. Weapons should not be distributed widely and inexpensively.

libre: Academics have been talking for years that so-called active investing is a bad idea – that it is very difficult to determine which stocks will perform better than others in the long run. Doesn’t investing in ESG violate these principles?

Robchioti: In order to do a good job investing in social justice, you need to be active on these issues and watch out for when the company’s behavior changes in a way that has a real and material impact on its future.

Domini: Take Square. They had an arguably powerful story of empowering small business owners, and it’s a powerful topic of economic justice that you can get excited about. Where they are becoming more and more a blockchain company – to the point where they are They changed their namethat initial sensationalist thesis is becoming less common.

libre: It might be best for curious investors to play with the word “active” next, and think of ESG as an active investment. If someone is going to pay higher-than-average fees—or at least higher-than-core money fees charged by companies like yours—it shouldn’t be just silently moving money from one public company to in a way that might not have much of an impact. Activists are applying pressure. They make noise.

Domini: We wrote 150 companies in Japan, to indicate that there are two genders and their boards of directors did not reflect this fact. Japan doesn’t have strong chances to solve the shareholder problem, but that doesn’t mean you can’t have it some activity.

libre: We are in a bear market now. This is often the time when people are looking to reduce costs in their investment portfolios. There is a long history of concern in the investment industry about the fact that your money isn’t cheap. Do you lose in such market conditions?

Domini: You have ESG products now in forefrontAnd the devotionAnd the TIAA. They all do so because it adds value to the investment decision-making process. This does not go away. It is here to stay.

Robchioti: Historically, women and people of color – especially blacks like myself – were not allowed into this industry. Now that we’re starting to show up, we’re in a position where we have tremendous price pressure. “Reduce your fees!”

Organizing, mobilizing, educating other investors, compiling data sets – all this requires people. You should be able to invest in it.

So I would really wonder if someone is making an impact at a really low price point. Often times, often with a cheap ESG, you can run into a data wall and get stuck. And what we did was break the data wall.

libre: OK, but do you always trust the data you get from the companies themselves – raw numbers or the way things might be counted selectively?

Robchioti: We use less data that companies provide on their own. Data collected independently by third parties that they verify with public company practices is what we really rely on.

libre: Elon Musk may disagree about the value that ESG adds. How are you going to try to impress him with 100 words or less?

Robchioti (chuckles): Here’s what I’m going to say: The reason you’re confused is because you’re a CEO for one cause, and that’s not the way to go. The way to the future is people and planet, and a shattered society can’t make anything, including electric cars.

Domini: He pursued my field rather than pursued the pointer that ruled it out. The entire industry did not fire him.

libre: Individual investors face dozens of environmental, social, and corporate governance choices. Goldman Sachs and others hope that familiar names will matter. What is the right framing question people should ask when financing shopping?

Robchioti: Actually there are three. First, what is your problem? For us, these are race, gender, economy and climate, because these are places where capitalism extracts unsustainable value.

Then how do you measure it? And the most important question, beyond a reasonable doubt, who decides what matters? Go to the people most affected and ask them what is important, because they are the ones closest to the problem and often the furthest from power. This is information that investors do not currently have access to.

libre: What is the most inconspicuous example of this third example?

Robchioti: When we went to Poor campaign They asked us what we should focus on, they led us to work with him one fair wagewhich works to abolish the minimum wage for workers in tipping.

we created”Liveable Wage Investors“It was a collective Investor Statement Which represents more than half a trillion dollars in investor money, by the signatories, making the case for all public companies ending minimum wages.

libre: This all seems like a lot of work for an investor. Where is my interactive tool that allows just one of the many chests to be my top choice?

Domini: I feel like a step is better than not taking a step. I’m not totally about who does the better analysis, or one that aligns with my own. I’ve looked at so-called strict portfolios that contain stocks that I won’t put in my portfolio.

libre: So this analytical paralysis is my problem – isn’t that the industry’s problem?

Domini: I love women owned businesses, if you want to start with something!

Robchioti: Just 1.4 percent All assets in companies located in the United States are managed by companies owned by women or people of color. So you can narrow your world down there.

The reason why this is so important is because doing it the way we’ve always done it has given us the world we live in now. If we had a different world – if we were to invest in making more of what we actually wanted – we would have to pick a different group of people who weren’t at the table yet.