Value investing (not that kind)
ESG is a signal, not a solution.
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Money has always been simultaneously an object of fascination and repulsion for me. Growing up without a lot of it, I used to take great pleasure in saving as many £5 notes from dog-walking in a plastic sleeve I’d keep hidden between books. Hoarding money felt good. Fast forward to my early 30s and I’d saved enough money to make me feel guilty. I don’t have ten’s of thousands but I have a lot more than I did and I had enough to know it would be worth investing, rather than just saving.
Even though I felt weird about having money to ‘spare’, I wanted my money to earn money, because if it’s not growing it’s shrinking (inflation is a b***h). Investing is a big, scary world that’s entrance is obscured by maze of technical language. On top of thinking about questions such as debt vs. equity investing I came up against moral questions, in particular, how could I invest in a way to align with my values?
ESG investing seemed like a good place to start looking, investments that consider not just financial returns but dimensions of the ‘Environment’, ’Social’ and ‘Governance’, what’s not to like? Having worked on a tropical forest business incubator I was looking forward to seeing what exciting, impactful businesses I could put my money behind, but that excitement was premature.
ESG funds - behind the curtain
My journey in to ethical investing started during lockdown, I had a lot of time on my hands, which let me get into the weeds. As a prospective investor you’re given access to a set of information to inform your decision. One of these pieces of information is a list of the companies in a fund you’re interested in, and what percentage of the fund that company represents. Scanning the list of companies I was surprised what was in these gold-standard ESG funds. Firstly, there are a lot of tech companies, Meta (Facebook) being one of them. Now, I don’t think Facebook is evil, but I do think it’s making some questionable moral choices in the pursuit of profit. Secondly, there are a number of pharmaceutical companies. I am very grateful for living in an age of modern medicine, my closest family members would not be alive without it. However, I have the same issue - most pharmaceutical companies are making some questionable moral choices in the pursuit of profit. ESG funds didn’t seem like the best place to find the cutting edge of ethical investments.
So I turned my attention to dedicated ethical funds and found some pretty interesting private funds. Unfortunately, the one I was most interested in had a £20,000 minimum buy-in, I had 10% of that to invest. So back to ESG rated funds I went. I opened a Vanguard account and bought into a selection of their ESG funds. Since then while interest in ESG investing has grown, the growth in those criticising it seems to have grown faster, with one of the biggest criticism being there are no standards, people can pretty much do what they want and label it ESG.
Creating value in line with your values
Value in the world of money is a funny word. In the world of finance, value investing is about finding companies that the market hasn’t properly valued - they’ve underestimated what that business is worth and when the market figures that out, and you beat everyone else to it, you ride the wave to the top. When we talk about value in money we talk about how much we get for our money. What about our values? How does that play into things?
One of the criticism’s of ESG I’ve heard is that it’s based on values, which are individual preferences. Individual preference in the world of finance are not desirable, just as they opinion in science isn’t. But what’s wrong with that? Why can’t we live in a world where we invest based on our set of values. This isn’t a new idea, Halal investment has been around for a long time. Imagine a world where you can really vote with your pound, invest in funds that are explicit about the non-financial value they want to create.
The signal, not the solution
ESG investing is a signal, not a solution. People are voting with their money and saying they want more than just the maximum possible financial return. They are saying they don’t want to be part of companies that destroy water quality, air quality, that exploit the human workforce and ignore human rights. ESG is far from the solution, but it’s a step in the right direction. Now what we need is people working in this area to honestly try and achieve that. I’d put money on the fact many of those working on ESG are frustrated by the lack fundamental change. There are many in power that benefit from the status quo, but there are also many in positions of influence that want to be part of the solution to achieve a better world. If you ask me ESG is a signal, and it is the only start of a fundamental shift.
