The Killer Instinct of ESG/Socially Responsible Investors
By Greg Fields
If you’re trying to get away with something shady, taking a shower afterward will NOT make you clean. Forty-seven minutes into his macabre masterwork PSYCHO, Alfred Hitchcock mercilessly pulls the rug out from the audience by killing off protagonist Marian Crane (Janet Leigh) in the most iconic slasher scene in all cinema history. For the infamous “shower scene”, Hitchcock seems to illustrate how karma kills; literally. Like gravity, bad behavior tragically pulls young Marian down, bringing her plans for a new life funded with a bag of stolen cash to a violin glissando-screeching halt. Just deserts with no dessert.
Since 1960 when PSYCHO was released, one might argue our tolerance for dishonest, deceptive, even immoral behavior has actually changed for the worse. But the principle of bad behavior’s downward gravitation pull has not. You can get away with lying, cheating, and stealing – until you can’t. Donald Trump’s mentor, attorney Roy Cohn, trampled legal ethics for years, but ultimately ended up dying disbarred and dishonored. Lance Armstrong doped his way to Tour de France yellow shirts but ended up confessing his sins to Oprah. Cheating on your taxes doesn’t make you “smart”; it eventually makes you a sitting duck for the IRS.
Similarly, corporate America is getting a dose of Hitchcock horror from activist investors. They know shareholders can and will punish them for irresponsible corporate behavior or cutting corners in the name of short-term profit. The last thing a CEO wants to see in their social feed is a Twitter-fueled boycott of her company’s products. And the Socially Responsible (aka ESG or Environmental, Social, Governance) investment movement fueling c-suite dread is now mushrooming. Forbes estimates the managed ESG space to be worth a whopping $20 trillion worldwide.
Just a few years ago, when I attempted to bring Environment, Social and Governance Investing into the fold of the big wirehouse where I worked, I was shunned for my naivete. “ESG underperforms”, I was told. Old-school brokers sneered that Socially Responsible Investing was, “just marketing bullsh-“. Another criticism was that sustainable investing was a strictly niche product designed for women and millennials. But Morningstar’s recent comprehensive study showed 72% of all investors are interested in companies that meet positive Environmental, Social and Governance criteria. Google, for example, committed to carbon neutrality in 2007 and is now the largest corporate purchaser of renewable energy in the world. This Captain Obvious moment for me was part of the reason I took my show on the road to an independent, activist firm that recognized how social consciousness was quickly becoming a critical facet of investment selection.
But it’s not just about slipping on your goody-two-shoes; ESG is just plain common sense. Socially responsible companies intuitively appear to be better investments over the long term. Break down the components of ESG. “E” or “Environmental” refers to carbon footprint and efficiency. Since when did efficiency NOT boost bottom lines? From an economist point of view, if you’re squeezing more out of inputs, costs fall for output. Duh. “S” or “Social” refers to company policies that, among other things, embrace diversity and forbid workplace discrimination on the basis of gender, race, sexual orientation, etc. If the company culture is hostile to employees, they will run for the exits. Then comes the endless docket of lawsuits. The churn of constant onboarding and training new employees is ruinously expensive – anywhere from six to nine months of the fleeing employee’s salary. Excessive HR costs reduce profit.
“G” or “Governance” refers primarily to how well a company adheres to its industry-specific government regulations. If a company is constantly paying out millions or even billions of regulatory fines, that money is going to come out of investors’ pockets in the form of diminished profits and dividends. Moreover, does anyone really want to be in business with companies that wield their size and power at the expense of regular people? Since 2000, JP Morgan Chase has paid out $13 billion(!) in fines for “toxic securities abuses”; $4.5 in “investor protection violations” and $614 million for “false claims” (Violationtracker.com). Is anyone honestly going to deny the fact that JPM could have been a much more profitable company if not for these catastrophic debits bombing their balance sheet?
The fate of PSYCHO’s ingenue, Marian Crane, should also be taken as a warning to those CEO’s feigning ESG credentials. A warm, fuzzy, “socially responsible” marketing campaign amidst continuing corporate abuses will not shower away ongoing transgressions. Just like the demented Norman Bates, investors are going see through your split personality and “put you away somewhere”.
Greg Fields is a Financial Advisor of Santa Monica, Calif-based Gerber Kawasaki Inc., an SEC-registered investment firm with approximately $921 million in assets under management as of 10/21/19. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which course of action may be appropriate for you, consult your financial advisor. No strategy assures the success or protects against loss. Readers shouldn’t buy any investment without doing their own research to determine if the investments are suitable for their situation. “All investments involve risk and one should consult a financial advisor before making any investments. Past performance is not indicative of future results.”