Podcast Summary
Maximizing risk-adjusted return vs. focusing solely on expected value: While maximizing risk-adjusted return is crucial, avoiding the trap of solely focusing on expected value is equally important. ESG investing, with its ethical focus, offers a unique perspective on business and finance, but it's essential to consider its limitations and potential pitfalls.
While maximizing risk-adjusted return is important in investing, it's crucial not to fall into the trap of solely focusing on expected value or return. The discussion also touched on the topic of Environmental, Social, and Governance (ESG) investing, which gained significant popularity but is now facing criticism from various angles. Moral Money, a podcast that explores the ethical questions underlying business, finance, and capitalism, provides insight into this issue. When Moral Money was first launched, ESG was a red-hot trend, with every asset manager claiming to have a superior strategy. However, the momentum around ESG, particularly in the context of climate action, reached a peak at COP 26 with the launch of GFANS and the announcement of $125 trillion in managed assets pledging to reach net zero. This was compared to the "mission accomplished" moment after the invasion of Iraq, highlighting the potential for overconfidence and unrealistic expectations. It's important to remember that ESG investing is not just about morality but about understanding the ethical questions that underpin business and finance as a whole.
ESG Investing: A Contentious Issue in the US: ESG investing faces opposition from conservative politicians and media figures due to its perceived rejection of capitalism and historical influence of oil and gas companies in the US.
Environmental, Social, and Governance (ESG) investing has become a contentious issue in the United States, particularly among conservative politicians and media figures. The lack of immediate costs for large financial institutions to sign up to ESG principles has led to widespread adoption. However, when political opposition arose, many institutions' initial enthusiasm waned. This controversy can be traced back to the significant influence oil and gas companies have historically held in the US, with some funding pseudo-scientific research to cast doubt on climate change. ESG investing has been portrayed as a rejection of capitalism and even "satanic communism" by some right-wing politicians. Recently, conservative media figures like Tucker Carlson have amplified this narrative. As a result, investment managers face challenges selling ESG products in the US, with many avoiding defense stocks but reconsidering this stance following Russia's invasion of Ukraine. Overall, ESG investing remains a complex and politically charged topic in the US.
ExxonMobil's lawsuit against FollowThis and SEC's new rules: ExxonMobil's lawsuit against FollowThis challenges SEC's new rules allowing smaller shareholders to propose resolutions, potentially impacting shareholder activism and corporate responsibility in addressing climate change concerns.
The relationship between corporations, shareholders, and regulatory bodies is evolving in the context of climate change activism. ExxonMobil's lawsuit against an activist investor group, FollowThis, sheds light on this dynamic. Exxon's primary issue isn't with FollowThis but with the SEC, which changed its rules to allow smaller shareholders to propose resolutions. Exxon's lawsuit aims to challenge this new approach, potentially impacting shareholder activism as a whole. The Climate Action 100 initiative, a collaboration of major investment firms, also faces challenges, as companies resist pressure to reduce their carbon emissions. These cases underscore the complexities and controversies surrounding corporate responsibility, shareholder activism, and regulatory intervention in the face of climate change concerns.
Shareholders vs Activists: Complexities of Influencing Companies' Environmental Policies: Shareholders can file resolutions, but activist groups need significant stakes to effectively influence. Initiatives like Climate Action 100+ aim for info then emissions reduction, but some institutions withdraw due to concerns over overreach and misalignment.
While shareholders have the right to file resolutions, activist groups must ensure they hold significant stakes to effectively influence companies' environmental policies. The Climate Action 100+ initiative, which involves asset managers pushing for climate action from invested companies, is a complex issue. While the first phase focuses on requesting more information, the second phase involves pushing for emissions reduction, which can be more contentious. Some large US institutions, like State Street, JPMorgan Asset Management, and PIMCO, have pulled away from such initiatives due to concerns about overreach and potential misalignment with investors' interests. BlackRock, as a major player, faces criticism for its stance on climate change, with some arguing that its actions may not always align with its clients' fiduciary responsibilities. The debate highlights the complexities and potential consequences of shareholder activism in the context of environmental issues.
ESG Investing Challenged: Performance and Fairness Concerns: The effectiveness and fairness of ESG investing are under scrutiny, but addressing climate risk and social issues remains vital for sustainable investing as we transition away from fossil fuels.
The current form of ESG (Environmental, Social, and Governance) investing, which prioritizes non-financially viable factors over traditional business logic, may be facing challenges. The skepticism towards ESG, as expressed by the attorneys general's letter to BlackRock, and the recent poor performance of ESG funds, have raised questions about the effectiveness and fairness of this approach. However, it's essential to keep in mind that we're witnessing the end of the fossil fuel age, and the energy transition is underway. The focus should be on ensuring this transition happens effectively and fairly. This might mean that the ESG sector, as it currently exists, may evolve or even fade away, but the importance of addressing climate risk and other social issues remains crucial for the future of sustainable investing.
Governments need to align business practices with sustainable outcomes: ESG investing's importance remains, despite challenges, as it shapes a more sustainable economy, and ignoring environmental, social, and governance factors is not meeting client responsibilities.
The conversation around sustainability and ESG investing requires more serious action from governments, updating rules and laws to align business practices with sustainable outcomes. The ESG label may evolve or fade, but the importance of considering environmental, social, and governance factors in investing is here to stay. Despite recent challenges for ESG funds, any investor ignoring these factors is not meeting their responsibilities to their clients. I'm long-term bullish on the future of ESG investing and the role it will play in shaping a more sustainable economy. Additionally, I'm a strong advocate for legacy media, which continues to provide valuable context, depth, and factual information in an increasingly misinformed world.
The Importance of Legacy Media in an Era of Misinformation: Legacy media plays a crucial role in providing authentic news and analysis, especially in an era where discerning fact from fiction on social media can be challenging.
With the increasing prevalence of misinformation on social media, the importance of reliable news sources like legacy media has become more apparent. Even intelligent individuals can struggle to distinguish fact from fiction, making it crucial to have trustworthy sources to separate reality from deep fakes. A current example of this is the ongoing saga of Sam Bankman-Fried, the FTX founder who was found guilty of fraud and money laundering charges but continues to make headlines due to his ongoing legal battles and public persona. Despite these allegations, Bankman-Fried remains a newsworthy figure, highlighting the need for credible sources to provide accurate information. In summary, the value of legacy media in providing authentic news and analysis cannot be overstated, especially in an era where discerning fact from fiction on social media can be a significant challenge.
