'The dubious appeal of ESG investing is for dupes only'

Some months ago I took a deep breath and moved my pension from a traditional pension provider into an investment fund. I wouldn’t call myself a skilled investor. I didn’t look very hard at the options, but before choosing which fund to put my money in, I did glance at the biggest investments within each of the available funds to see what where the money was going. I was shocked when the first fund I looked at had for its largest single investment British American Tobacco. I couldn’t believe it. Instead, I chose an ESG (ethical, social, and governance) fund, that invests only in companies with these goals. Was I wrong? According to the FT, I am “a dupe”. 

In an opinion piece in the FT, 24 August 2020, entitled “The dubious appeal of ESG investing is for dupes only”, Robert Armstrong gives some reasons for rejecting ESG investing. In so doing, he reveals some of the values at the core of the Financial Times.

 Why not invest in ESG funds? Because, according to Mr Armstrong:

1. They do not provide “adequate” returns
2. They provide cosmetic, rather than real change
3. Behind ESG and stakeholderism lies a dangerous idea: Shareholders’ economic interests and the social good always harmonise over the long run.

Armstrong’s argument is that since economic interests and social good do not always harmonise, there is no point in seeking for them ever to harmonise.

First, let's confirm the terminology. “Stakeholderism”, also referred to in the article as “stakeholder capitalism”, is defined in Investopedia as follows:

Stakeholder capitalism is a system in which corporations are oriented to serve the interests of all their stakeholders. ... Supporters of stakeholder capitalism believe that serving the interests of all stakeholders, as opposed to only shareholders, is essential to the long-term success and health of any business. 

Mr Armstrong has a PhD in philosophy, so you would expect him to know how to argue a point. He is also chief editorial writer, so you can assume he offers a fairly standard FT approach. Here he argues that companies ultimately make decisions for shareholders, not stakeholders, and this commits them to making short-term policies. As he memorably states:

 it is obvious that shareholders’ and stakeholders’ interests can conflict. If they did not, there would be far fewer lay-offs announced and far fewer oil wells drilled.

For some perhaps unconscious reason he describes drilling an oil well as a necessary short-term activity for a company. I know it is a common phrase, used without thinking, but drilling an oil well is the very thing that investors in ESG companies hope will not happen. We don’t drill oil wells any more, Mr Armstrong. I would suggest the goals of ESG investors (certainly my goals) are as follows. I want companies to carry out their activities for the long term. I mean by that a sustainable activity, not one that results in the destruction of the planet (the example of Rio Tinto destroying a 46,000-year-old Aboriginal cave in Australia to expand their iron ore mine springs to mind). Perhaps Mr Armstrong regards that destruction as an understandable and necessary short-term activity that companies will do.

In any case, he states, we have “democratic action and the rule of law” to fall back on, in case companies misbehave. Although nobody lost their job at Rio Tinto after this environmental disaster, so perhaps there is no law against destroying cultural heritage. In any case, the law is usually a few years behind the latest commercial practices. Perhaps that explains why the FT regularly reports on the activities of tobacco companies and praises them when their profits increase – see, for example, “BAT beats profit forecasts as US stimulus bolsters sales” (30 July 2020). The “US stimulus” they refer to is government unemployment support during the coronavirus pandemic, which “has meant smokers have not been forced to switch to cheaper brands, smoke less or quit”. Perhaps if you follow Mr Armstrong’s principles, than companies like BAT should carry on doing what they do, and continue being one of the biggest dividend payers in the FTSE 100. You would be a dupe to think otherwise. 

Postscript: about a week later, the Chief Executive of Rio Tinto was sacked.