ESG Investing’s Benefits, Baggage

Mahatma Gandhi said, “Earth provides enough to satisfy every man’s needs, but not every man’s greed.” 

Environmental, social and governance is a framework embedded in an organization’s strategy that considers the need and ways to generate value for all organizational stakeholders, including shareholders, managers, employees and society.  

The iShares ESG Aware MSCI USA ETF (ESGU) is highly liquid, with almost $20 billion under management. The fund trades over 1 million shares daily and charges a 0.15% expense ratio. ESGU holds companies rated on ESG factors and excludes those businesses involved in tobacco, controversial weapons, civilian firearms, thermal coal and oil sands.  

The Biden Administration has favored using ESG factors for retirement accounts, and reversed the previous administration’s limits on retirement plan sponsors when considering ESG factors.  

One can be forgiven for seeing the controversy as another divide in our culture: ESG supporters say detractors are greedy capitalists, while opponents believe that rules on directing investments to these funds amount to a socialist agenda.  

ESG Pros: Greater Good Trumps Profits 

In November 2022, the Biden administration issued a final rule, making it easier for employers to consider climate change and other ESG factors when selecting investment fund options.  

Historically, the significant factor was risk and reward, where past profits and a continuation of earnings were the guiding force. The ESG rules add another dimension to the selection process and can include companies that work for the “greater good.”  

The 2022 Inflation Reduction Act funds climate change efforts and other ESG initiatives. An increase in ESG retirement investments is a funding source for social policies that could reduce government spending, replacing it with private sector investment.  

While the administration’s initiative doesn’t mandate ESG, it could be the first step toward further bolstering rules that drive capital to the sector. Meanwhile, with the national debt at $31.5 trillion and rising, the government could look to retirement assets as an alternative to higher taxes to fund its programs.  

ESG Cons: Capitalism's Only Goal 

Capitalism is an economic system based on private ownership of the means of production and operation for profit. Decades ago, when I studied business, the primary task of any company’s management was to increase shareholder value.  

Socialism is a political and economic philosophy that advocates that the means of production and exchange should be owned or regulated by the entire community.  

Those opposed to the administration’s initiatives believe they amount to socialism. In January, Florida banned using ESG considerations in its public investing, with Governor Ron DeSantis, a potential 2024 presidential candidate, proposing the anti-ESG legislation. 

He isn’t alone among politicians. Sen. Joe Manchin, (D-WV), recently stated, “At a time when our country is already facing economic uncertainty, record inflation and increasing energy costs, it is irresponsible of the Biden administration to jeopardize retirement savings for more than 150 million Americans for purely political purposes.” 

Many senators, congressmen and congresswomen have questioned the social policy motivation and goals that prioritize environmental and social factors at the expense of financial returns regarding companies’ investment decisions for workers’ savings.  

Those opposed believe ESG rules and potential mandates as a government policy are a political smokescreen, redefining fiduciary responsibilities.  

ESGU’s Performance 

The S&P 500 is the leading U.S. diversified stock market index and a benchmark for many investment managers. Over the past four years, the returns on the S&P 500 were: 

• 2019: up 28.87% 
• 2020: up 16.26% 
• 2021: up 26.89% 
• 2022: down 19.44% 
• On Feb. 13, with the S&P 500 at 4,130, it was 7.57% higher than the Dec. 30, 2022 closing level 

Source: ETF.com 

The returns for ESGU over the past four years were: 

• 2019: up 29.8% 
• 2020: up 20.6% 
• 2021: up 25.4% 
• 2022: down 21.4% 
• On Feb. 13, with ESGU at $91.21, it was 7.62% higher than the Dec. 30, 2022 closing level 

While ESGU outperformed the S&P 500 in 2019 and 2020, it underperformed in 2021 and 2022, and was keeping pace with the benchmark over the first weeks of 2023.  

On the one hand, if the government favors ESG companies with contracts under the Inflation Reduction Act, it will support earnings. On the other, future elections will have consequences, which could cause volatility and divergence between ESGU and the S&P 500. 

The debate over the government’s role in ESG investing will continue. With gridlock in Washington, D.C., the odds of mandates and further regulatory moves to support or oppose ESG are low.