Robert Armstrong of the Financial Times invites ESG investors to prove him wrong on his recent piece Why The ESG Investing Industry Is Dangerous. Founder, Managing Partner Bill Davis and Portfolio Manager Kyle Balkissoon take on Robert Armstrong and The Financial Times on their heavily opinionated piece on ESG and discusses why they are wrong.
Robert Armstrong, US Financial Commentator
August 24, 2021
Good morning. Those of you who have read too many of my anti-ESG screeds already may want to skip this letter. But I have no plans to shut up on this topic. We’ve got big global problems. I am a capitalist red in tooth and claw, but I just can’t see how financial markets have a meaningful part to play in solving these problems until citizens and governments act first and decisively.
Email me and tell me why I am wrong: robert.armstrong@ft.com
Hi Robert,
We’ll take the bait.
We are Kyle Balkissoon and Bill Davis, Portfolio Managers at Stance Capital in Boston. Stance is an asset management firm purpose-built around values-aligned investing.
We aren’t going to quibble over some of the points you make, because they aren’t central to anything other than Mr. Fancy’s “darkly funny anecdotes” as you put it, about his former employer. And to be sure, we agree a carbon tax is essential to change the current trajectory, but that doesn’t obviate the importance and impact of investors, large and small, exercising their right to choose how to invest and vote their shares.
It’s hard to find much daylight between you and Mr. Fancy, and the two of you assume Blackrock sets the standards to which all industry participants conform. In this regard, Blackrock isn’t much different from other large companies, they are at once part of the problem and part of the solution. They’ve been late to the game, have conflicting motives, and need to more consistently walk the talk of their chairman. Enough said about BlackRock, as our disagreement is with the central components of your arguments, which seem to be:
Without a carbon tax, nothing else matters
The primary mechanism of ESG is divestment
ESG claims to outperform, and if it did, everyone would already be doing it
Starting with the first of these, we happen to believe the collective acts of individual investors, be they retail or institutional, matter greatly. Consider politics for a moment. The U.S. congress is poised to approve a $1.2T infrastructure bill. Before that, Democrats won a narrow Senate majority. Before that there was a special run-off election in Georgia which was decided by 14,000 votes. It turns out the individual efforts of voters in Georgia contributed to a much larger outcome. This same dynamic takes place in other industries, such as the beverage industry. Consumers, exercising choices, one less soft drink at a time, have led to a significant re-direction of capital by leading beverage brands toward healthier options.
This is also happening with investors choosing to invest in companies that better align with their values. This is a vote of confidence in management teams to continue what they are doing and can empower executives to make decisions that have positive externalities.
We agree there is rampant greenwashing and would be happy to engage with you on some related topics such as why so many ESG products are merely a proxy for mega cap tech and comm services, but we can save that for another day. As investors get more discerning about ESG, the greenwashing will diminish. But remember, the only reason the SEC is now looking at standard setting around ESG is because of the ramp up of investment activity in this space. Everything is connected.
On your belief that the primary mechanism of ESG is divestment, we disagree. That might have been the case ten years ago, but today the primary mechanism of ESG is multi-dimensional engagement. The first dimension of this engagement comes in the form of institutional asset owners and managers, NGOs, and others, leaning into large carbon emitters through efforts such as Climate Action 100+, which now includes over 600 investors globally, representing some $55T in AUM. These investors are comparing notes and joining active engagement efforts with management and boards to get them to do more about climate governance, alignment with TCFD reporting standards, and staged and purposeful progress on carbon reduction. If efforts aren’t satisfactory, these investors are increasingly using the tools at their disposal to demand change through the filing of shareholder resolutions, replacing corporate directors, etc... Think Engine #1 and Exxon. Divestment is viewed as a last resort.
The second dimension to engagement is a growing awareness that investors can use their money to do more than preserve it or grow it. Indeed, they are awakening to the idea that they can have a values-based relationship with their capital without sacrificing performance.
Which brings us to the third component of your argument which implies that ESG does not in fact generate outperformance. You completely miss the point that ESG need not in and of itself outperform as long as the investment itself outperforms. In terms of returns or performance, it has been our view as practitioners for the last 7 years, that performance and alpha can be (and maybe should be) independent of values alignment, which is to say if a manager has skill, it can be very simple to find the intersection between companies the manager believes will outperform and companies that share the investor’s values. We believe that by combining these views and layering in strong risk management is a recipe for not only outperformance but also aligning investment capital more closely with client values. Put differently, given two investment portfolios with identical risk to return characteristics and different levels of values alignment for the underlying client, the one that is most aligned will increasingly be preferred. In this sense, values alignment is a free option.
The final point we’ll make is that one of the reasons there is so little authenticity in ESG coming from the mega-asset firms, is because they are using pay-to-play frameworks to push the shiny objects that earn them bigger profits, seemingly with little else in mind. But they are serving a purpose which is to raise the noise level around ESG and are certainly starting to step up their proxy voting game. We have confidence that investors of all shapes and sizes, acting with other stakeholders will take advantage of their reactiveness to push them further still. Not the full solution to climate risk, we agree, but certainly a piece of the puzzle.
Email us and tell us why we are wrong:
kyle@stancecap.com
bdavis@stancecap.com