ESG: How the generations invest

Alienating your customers is not good for your stock price — values and valuation can go hand in hand.

Recently, Nike took sides in a bitter debate by using the footballer Colin Kaepernick in an ad campaign. Picture: AFP

In our polarised age, perhaps it should be no surprise that the idea of values-based investing would inspire strong views. Carolyn Donnelly, a managing director at CIBC, says her team saw it first-hand when it held an event to introduce clients to the idea of investing through an ESG lens, or screening investments based in part on environmental, social and governance considerations.

“Well, of course,” said investors in their mid-40s or younger. “Why would I invest in a way that doesn’t align with my values?”

Many older clients, Donnelly said, took precisely the opposite view. They were angry at the suggestion that someone would try to impose moral judgments on their money. The adviser’s job, they said, was to maximise returns. Period.

But the generational — and philosophical — divide may be smaller than the grumpy oldsters and naive young ’uns believe. Let’s start with the “G”. As Adam Seessel pointed out in an eloquent takedown of ESG last year, all investors care about corporate governance. Enron and Lehman Bros taught us that, if we didn’t already know.

‘Why would I invest in a way that doesn’t align with my values?’

The “E” is more fraught, but does it really need to be? Sure the “climate change is bunk” crowd lives on, but rather than get into a meteorological argument, I’ll just point to property and casualty insurers. For decades, they have been pulling back from low-lying areas. Does anyone believe that the actuaries are motivated by politics? And if they were, wouldn’t an apolitical entrepreneur come along and make a killing by writing policies on oceanfront properties no one else would insure? Would you bet your retirement savings that, 10 years from now, we’ll have more power from coal and less from solar and wind?

The “S” represents the biggest divide in the ESG discussion. Some people won’t want to invest in companies that provide contraception benefits in their health-care plans, while others want to avoid those that don’t. Go ahead and vote your conscience. Or, if you really believe that investors should focus only on returns, then you might ask yourself which of those companies is likely to have a broader pool of young job applicants to choose from.

In the meantime, as government pulls back from regulation, the free market is working out a lot of the social issues on its own. Salesforce, Delta Air Lines, Amazon.com, eBay and Walmart have taken stances on guns. Nike took sides in a bitter debate by using the footballer Colin Kaepernick in an ad campaign. YouTube changed its policy on hate speech. And US auto companies are actually pressuring the government to boost fuel-efficiency requirements.

All of these companies were acting in self-interest. In fact, in the age of social media, reputational risk has increased dramatically. Investment analyst Caleb Tuten of GMR noted that in 1975, tangible assets accounted for about 85 per cent of the S&P 500 index, while the rest was intangible assets. Now it’s the other way around, and 85 per cent of the market’s capitalisation is made up of intangible assets, including brand value. Alienating your customers is not good for your stock price. Values and valuation can go hand in hand.

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