Leading with our Values

I remember the day our first child was born. It was one of those emotional, transformative moments. My wife and I had been up for over 24 hours. We were well past the due-date, but since this was her first baby, everything was taking a looooong time. Finally, our oldest was out, everyone was healthy, and we were relieved, amazed, excited, and exhausted all at the same time. Coming home to grab a few hours of rest before heading back to the hospital, I thought: “The world will never be the same.”

Most everyone wants to make the world a better place, for ourselves, our children, our grandchildren, for humanity. We make personal choices with how to spend our time, our money, our energy. We dedicate the seasons of our lives to preparing, producing, providing and protecting our legacy. Stephen Covey’s Seven Habits of Highly Effective People urges us to “begin with the end in mind.” How do we want to be remembered?

Sometimes, opportunities to change the world come in great, heroic moments. My uncle served in Korea, designing and delivering a way for front-line troops to communicate with air support. He joked about how, during one delivery, he traded his warm Navy overcoat for a Marine gunnery sergeant’s poncho. When he didn’t return the jacket to the ship’s quartermaster, he reported it as “lost in combat.” But heroic moments don’t come to us that often. Remember “Tank Man” from Tiananmen Square, facing down a column of mobile artillery while holding a couple of shopping bags?

Photo: Jeff Widener/Associated Press. Fair use. Source: Wikipedia

But we can make everyday choices, choices that change the world in little ways. When we read aloud to children, that builds trust and connections that strengthen our bonds. When help a neighbor with snow shoveling or to look out for their property when they’re away, that builds a neighborhood spirit. And when we choose to invest our capital with our values in mind, that can have a positive impact as well.

Environmental, Social, and Governance (ESG) standards have become buzz-words, recently, because there is broad society-wide movement to encourage companies to look out for the environment, push for social change, and improve their governance standards. In theory, there is little to object to. Who doesn’t want a cleaner environment, social justice, and better corporate governance? The idea fits into our inherent desire to do something positive with our investments to try to make the world a better place. Can we just buy some ESG mutual funds and feel good about ourselves?

 It’s never that simple.

First, how do we measure our goals? There are at least eight different ESG ratings agencies, each with its own way of measuring and rating. It’s not a whole lot different than the early days of accounting. A century ago, there were no uniform standards for revenues, inventories, profits, or capital. It was hard for investors to tell if a company was profitable. Part of the reason early approaches to investment management depended so much on dividends is because dividends were the only aspect of corporate finances that could be actually verified.

And it’s even harder with ESG standards. How much carbon is involved in producing a can of Pepsi, or in providing health insurance? Should a hospice provider be penalized on its environmental score because its employees drive to their clients’ homes? What constitutes “community investment” for a global company like Johnson & Johnson? Over the years, the SEC has weighed in on accounting controversies like employee stock options and derivatives contracts. We don’t have clear, uniform ESG standards yet.

And there is the issue of “greenwashing.” ESG reporting is mostly self-reporting. Companies can make token efforts to look good that don’t make any real difference. The classic example of this is hotels that put placards in the rooms asking guests to reuse their towels to “help the environment.” In fact, most hotels are be just trying to reduce their laundry bills. There’s no evidence that water use or other measurable environmental factors improved. The possibility of greenwashing is closely related to Goodhart’s Law: “When a measure becomes a target, it ceases to be a good measure.” Once management knows that they can be rewarded for reaching certain goals, they can get quite creative in how they report their progress. If you can define the target, you’ll always hit a bullseye.

Source: Pixabay.

Finally, investors need to understand the true impact of values-based investing. If lots of investors are successful in avoiding “bad” companies and promoting “good” companies, what will happen? The stock prices of those “bad” companies will go down, their bond prices will go down, their cost of capital will go up. Some of those companies may not be able to survive that higher cost of capital. But the survivors will take over that economic space, and will profit from the lack of competition. They’ll provide increased returns to their shareholders.

This isn’t an excuse for under-performance. But whether you exclude some sectors because you don’t like their business, or you seek out emerging approaches to long-term problems, financial theory says that such portfolios will either be riskier or not return as much over the long haul.

This means, if you do it right, ethical investing may help the world to become a better place, but it may not help your portfolio. This is a controversial point (recently made by a large fund manager), because it goes against our instincts. How can it cost me money to do the right thing? But when you think about it, it makes sense. There’s no free lunch, especially when it comes to markets, finance, and investing. Anyone who says otherwise is probably hiding something.

Source: Pixabay.

So is it worth it? Is it worth wading through the problems to invest with our hearts?

The short answer is yes, most people really *do* want to express their values in the way they invest their funds. And major problems for institutions aren’t an issue for individuals. I’m talking about what no one likes to talk about: the question of whose values get expressed. Institutions face real constraints. They have certain legal obligations to every investor which they can’t ignore or just assume away. When fiduciaries start to act like they own the assets that they managing for others, that’s a big problem.

But individuals are free to act as their conscience dictates. In fact, I would maintain that we already do this. Whatever we truly value, that’s where we place our time, energy, and money. And once we know how to make it happen, we have a sacred duty to our own souls to do what we believe is the right thing, rather than what’s expedient. Because our hearts will follow what we treasure. That’s what I thought when I drove back to the hospital, after my nap, all those years ago. We don’t do it for us. We do it for them.