E.S.G. in the Boardroom: A Recipe for Confusion

What would business do without its faddish buzzwords? Is the bottom-line really so boring? Transformational leadership was once in vague, with little actual attention to raising subordinates’ moral compasses. Decades later, everything was about drivers—a power-aggrandized version of cause. Then consultants, dreaming perhaps of their kids’ little league, turned the profession into an analogy and suddenly became coaches. One difference is of course that most actual coaches have been players in their respective sports, whereas how many leadership coaches have been business executives or sat on a board? “Leadership assistant” is better, if in-house, otherwise "leadership adviser," assuming sufficient study or experience in leadership. Then amidst global warming and activist stockholders, “E.S.G.” could suddenly be heard in boardrooms with the frequency of a trope.[1] Must business be led by a herd-mentality? Such leadership is internally inconsistent, for leaders are by definition ahead of the crowd, leading it rather than squawking like lemmings. In the case of E.S.G., which stands for “environmental, social, and governance,” the chatter eclipses recognition of the befuddled condition of the combo. With such different things in the mix, it is no wonder that a study attempting to quantify E.S.G. came up with mixed results. So the metric and purportedly related financial performance may not be very useful, after all.

E.S.G. “refers to the three main ways to measure a company’s commitments to ecological sustainability, to its community and to corporate governance.”[2] Large institutional investors, including BlackRock, the world’s largest asset manager, “have publicly declared . . . environmental, social and governance issues to be key metrics of their investment decisions.”[3] Although politically correct, this mantra has some rather severe drawbacks.

Firstly, what exactly is social? Good interpersonal relations inside a company?  Stable bilateral relations with key stakeholders (which sounds hardly social in nature)? Good relations with the towns and cities in which a company has a physical presence? Work on behalf of world peace? The term community is inherently such a vague notion, and it be applied to very different scales, from inside a factory to the world, that the social part of E.S.G. is problematic, especially when misplaced efforts to quantify “community” are involved. What may seem social could actually be economic, especially in stakeholder management. Also, having or being part of “community” is different than a corporate social responsibility program geared to alleviating a problem affecting employees, stakeholders, a city, or the world. This last point also applies to ecological sustainability—does this refer to a company’s own carbon footprint, or can a company get away with making financial contributions to Green Peace?

The second major problem is how different social and even ecological matters are from good corporate governance. A company’s board could improve accountability on management by severing the CEO from also chairing the board, but this does not mean that the same board has an ecological bent or wants to create a social responsibility program or give employees a sense of community (conditional, of course, given the power to fire). In short, E.S.G. combines apples with oranges. Not unexpectedly, they can relate differently with respect to financial results. Improving accountability structures and processes on management are more tightly connected to medium- and long-term financial performance than is working on a city’s problem, for instance. Improving stakeholder relations goes to the bottom line more than working for peace in the world. To be sure, the value of working on societal or global issues is real, and investors so motivated need not be thwarted by a loose relation to financial profits. The problem lies in combing E., S., and G. into a single measure and related it to financial performance.

A study by quantitative strategists at Bank of America—that bank that showed questionable smarts in buying Merrill Lynch—found mixed results in relating E.S.G. companies and profits. On the one hand, companies high in E.S.G. tend to have less volatile stocks, yet whether those companies outperform low E.S.G. companies, the answer depends on the industry. In health-care, technology, and consumer staples, the low companies actually outperformed the high ones from 2005 to 2015. In fact, the results generally were “very similar to the performance of large versus small companies.”[4] A mere look at the grab-bag of indicators demonstrates just how meaningless an overall E.S.G. number is. The study relied on a scoring system devised by Thomson Reuters, “which graded companies based on emissions and resource reductions, human rights, community engagement, work force diversity, training and development plans, board structure and compensation policy, and shareholder rights, among other things.”[5] Imagine quantifying human rights and board structure into one number!  It is as if the folks at Thomson Reuters were trying to come up with the general equation that so eluded Einstein relating the general theory of relativity to quantum mechanics! 

I submit that E.S.G. is an unstable molecule that would better serve business and society by being broken up into its component parts—its elements, each of which could be assessed, whether qualitatively or quantitatively. Some investors may want to invest in companies with a strong human rights record, while other investors may put a lot of emphasis on qualitative strength in corporate governance. Even within the social category, institutional investors could have very different things in mind—from workforce diversity to global warming. To be sure, investors could look for companies with diverse workplaces, no corporate social programs, and good corporate governance, or good relations with cities and good governance but no CSR programs to speak of—or all three. In short, the supposed positive correlations in E.S.G. do not hold in actuality even if it can be said that environment, social, and governance all have ideals. This is perhaps the underlying problem: the fallacy that says that just because x, y, and z have top values, the three variables are positively correlated. The other fallacy involved insists that everything in or affecting business can be readily or accurately quantified as if life itself were a spreadsheet. If investors really want companies to come out of their shells, it is vital to think beyond well-hooved business metrics and fads.

---

1. Andrew Sorkin, “Can Good Corporate Citizenship Be Measured,” The New York Times, June 26, 2017.

2. Ibid.

3. Ibid.

4. Ibid.

5. Ibid.

Biblically-Based Investment Funds: A Matter of Priorities

Is it biblical to say a Christian can serve both God and money? In the Gospels, Jesus speaks to this point directly; it is not possible. In early 2017, Inspire Investing established two new exchange-traded funds having a “biblically responsible” approach to investing—meaning that they would avoid buying shares in companies that have “any degree of participation in activities that do not align with biblical values.”[1] That such activities include even tolerance for gay employees raises the question of just how practical an evangelical investment strategy is after the U.S. Supreme Court made gay marriage legal in all of the 50 republics making up the U.S.

According to the New York Times at the end of February, 2017, 92% “of the Fortune 500 companies include ‘sexual orientation’ in their nondiscrimination policies and 82 percent include ‘gender identity.’”[2] Mark Synder of the Equality Federation pointed out that businesses “have been leading the fight for full equality over the last few years. L.G.B.T. people are part of the fabric of our nation.”[3] In short, the approach of the funds was “squarely at odds with that of nearly all of corporate America.”[4] Finding companies in which to invest in may not be so easy for the employees of the two funds. Put another way, the rate of return achieved may be compromised. Of course, an evangelical Christian would contend that compromise with sin is no virtue—certainly no Christian virtue.

Adding to the difficulties is the fact that not all evangelical Christians believe that discrimination is a biblical value, Snyder asserts. Of course, the very word discrimination is ideologically laden; it implies that the thing prohibited is salubrious rather than sordid in nature. Within evangelical Christianity, the tenet that sin explicitly listed in the Old Testament should not be supported or enabled is nothing short of an article of faith. Yet even here, that Jesus of the New Testament is silent on the matter of homosexuality may give even holders of that article some pause. At the very least, the question of priorities can be raised. Should not the funds avoid investing in companies that enable or contribute toward sins identified by Jesus? To put emphasis on a sin not mentioned by Jesus has the opportunity cost of the benefit foregone from focusing on sins that are important to Jesus in the Gospels.

In fact, that Jesus stood with the outcast might prompt an evangelical Christian to feel uncomfortable in taking on a marginalized group in society—especially the transsexuals. Yet Jesus tells the prostitute to sin no more, and gays today are not apt to view homosexuality as a sin and agree to abstain from sex. Gays would be on firmer ground in pointing out that Jesus preached love foremost—a sort of love not delimited to friends and family. Hence Jesus hangs out with the sinners, loving even the “unclean” rather than going after them or those who help them.

Hence the question: what would a biblical-oriented fund based on Jesus’s concept of love (i.e., agape) have as a metric? Companies in which people fight and insult each other, such as Uber, would presumably be off the list. So too would military contractors. But just as the traditional “sin” stocks involving tobacco, gambling, and alcohol would not necessarily be excluded, so too would the matter of a company’s HR policy on gays be of small import. In short, matching Jesus’s priorities in the Gospels would arguably be a sounder basis for a biblical-based Christian investment fund. In the end, the question is whether Christians truly understand Christ’s brand of love. I suspect that it is not as ideologically comfortable as the current practice indicates. I suspect that a truly Christian investment fund would not line up on one side of a general ideological division in society, for religion transcends ideology—otherwise faith reduces to self-idolatry.

---

[1] Liz Moyer, “Alongside Faith in Investing, Funds Offer Investment Rooted in Faith,” The New York Times, February 28, 2017.

[2] Ibid.

[3] Ibid.

[4] Ibid.

Divestment as a Carbon-Reduction Strategy

As gas prices were dropping during the fall of 2014 throughout the U.S., sales of SUVs were picking up. That such drivers might find themselves with gas-guzzlers and high prices was apparently out of sight, out of mind. Moreover, that the increased carbon emissions might push the planet further from the habitable zone for humans was a point entirely missing from the mainstream media as well as office-holders. To the extent that some “socially responsible” investors selling off their holdings in or related to fossil-fuel companies was generally deemed to be a suitable approach to global warming, the overriding question may be how a species could treat its own survival as if it were an after-thought rather than a priority.

According to The New York Times at the time, “180 institutions — including philanthropies, religious organizations, pension funds and local governments — as well as hundreds of wealthy individual investors . . . pledged to sell assets tied to fossil fuel companies from their portfolios and to invest in cleaner alternatives. In all, the groups . . . pledged to divest assets worth more than $50 billion from portfolios, and the individuals more than $1 billion, according to Arabella Advisors.”[1] Although these figures are by no means “chicken feed,” the overall imprint of such divestments pales in comparison to the assets in the American financial system, not to mention the global system of capital. The prioritizing of investors can perhaps be inferred here, with global warming coming up short—given its potential harm.

The divesting investors themselves were not convinced that their efforts would pay off climatically. According to the Times, “(t)he people who are selling shares of energy stocks are well aware that their actions are unlikely to have an immediate impact on the companies, given their enormous market capitalizations and cash flow.  At the Rockefeller Brothers Fund, there [was] no equivocation but there [was] caution, [according to] Stephen Heintz, its president. The fund [had] already eliminated investments involved in coal and tar sands entirely while increasing its investment in alternate energy sources. Unwinding other investments in a complex portfolio from the broader realm of fossil fuels [would] take longer. ‘We’re moving soberly, but with real commitment,’ he said.”[2]

To the extent that other investors would simply swap up the holdings for sale, the “bad” companies would be “harmed” only marginally—certainly not enough to make a dent in their role in the carbon-emitting process. Moreover, “moving soberly” at a time when climatologists were warning that the global temperature would rise more than the 2 degree C threshold (beyond which human habitation would be uncomfortable at best) points to a major disconnect between even the diverters’ priority and the true significance of the problem.

Pointing to the complexity involved in unwinding a portfolio is itself an indication of misplaced priorities akin to a passenger in an airport risking his flight merely because he wants to finish the meal he has purchased. That such a passenger would likely be completely unaware of the foolishness of his decision may suggest that we as a species may be utterly unconscious of our individual and collective lack of perspective as concerning our own medium- and long-term comfort and the survival of our descendants. Indeed, by 2014, the survival of even the future children of teenagers could be hanging in the balance. Touting divestment as a viable strategy, or even part of one, leaves me with the impression that the human brain may be ill-equipped to grapple with its own propensity to put the species itself at risk.

---

1. John Schwartz, “Rockefellers, Heirs to an Oil Fortune, Will Divest Charity of Fossil Fuels,” The New York Times, September 21, 2014.

2. Ibid.