As a reader of Wind in the Willows you will likely see the topic of ESG (Environmental, Social and Governance) investing come up a lot. Over the last several years it has become a flashpoint for investors, media and now politicians. Most recently, conservative politicians and lobbyists have made “Down with ESG” a rallying cry and they’ve even gone as far as creating non-profits to push back on the cause. We bring this up because there has been a lot made of the downfall of ESG lately. It would be very surprising if the tenor of this rhetoric didn’t continue to ramp over coming months as there is currently a lot of ammo available. ESG and Growth factors were very correlated over the last several years, so when Growth fell out of favor, so did ESG. It wasn’t because anyone made a decision that they don’t want to pursue better ESG practices, but rather that stocks often move because they have overlapping factors. Furthermore, sometimes the real world puts stress on ideology, making it difficult to be an absolutist. The war in Ukraine damaged both energy and food infrastructure in ways that made it unrealistic for some companies to stick to their normal ideals. Similarly, a few years earlier, freezing cold weather in Texas highlighted a need for greater grid resiliency and damaged the credibility of utilities moving away from fossil fuels. Does this mean that these companies are now inherently bad actors? Of course not, but the media loves negativity and politicians love a good soundbite for a campaign speech.
The point of ESG investing is often missed in these media and political arguments. ESG is not inherently woke and anti-ESG is not inherently conservative. The point of ESG is that when companies or assets are managed appropriately, their environmental impact, the way they treat people and the way they treat shareholders, should maximize economic potential by minimizing the likelihood of lawsuits and bad press. Surely there will be market participants that make decisions based on their political viewpoints, but more importantly, institutional investors are primarily motivated to maximize the value of their investments. ESG performance measurement is very subjective, but the pursuit of better versions of E, S, and G are all worthwhile and there will be tailwinds as investor flows continue in this direction.