A better argument for ESG, maybe
“ A few weeks ago Toby Nangle wrote a very good column in the FT, and I’ve been thinking about it, with some discomfort, ever since.”
© Financial Times
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Robert Armstrong and Ethan Wu JANUARY 27 2023
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Good morning. Sherwin-Williams (a paint company) joined the bad guidance gang yesterday: it said 2023 sales will be flat to down. The stock fell nearly 9 per cent. Not every cyclical stock is providing negative surprises, of course. Seagate (computer memory) surprised to the upside, and its shares rose close to 11 per cent. But the two are different. Sherwin-Williams is an expensive stock that dashed investors’ hopes for growth. Seagate is a cheap stock in a washed-out industry, which said things were not quite as bad as investors had thought. There is a lesson in there somewhere. Email us: robert.armstrong@ft.com and ethan.wu@ft.com.
Totalitarians, asset managers, and ESG
A few weeks ago Toby Nangle wrote a very good column in the FT, and I’ve been thinking about it, with some discomfort, ever since.
Nangle made his bones in the asset management industry, and he helped Unhedged (and a lot of other people) understand the 2022 British pension meltdown. His recent column took on the ethical quandaries raised when fund managers invest money on behalf of totalitarian states’ sovereign wealth funds, central banks or pension funds. Nagle singles out China’s CIC sovereign wealth fund and Saudi Arabia’s Public Investment Fund, and raises the awful spectres of Uyghur re-education camps and the murder of Jamal Khashoggi. He writes:
While working on a state mandate, asset managers effectively become outsourced treasury officials seeking to boost their client’s financial power. In other words, they help authoritarian states around the world to finance aims that can be both repressive and repugnant.
I would not want to do that sort of work. I feel strongly that democracy is better than autocracy, and I think it would be better if autocrats had to manage their own money, without help from clever people who enjoy the great privilege of living in a liberal democracy.
What bugs me about this thought is that it seems to fit poorly with my deep scepticism about environmental, social and governance investing in general. One of my main arguments against ESG is that its primary mechanism of action must be influencing companies’ cost of capital and therefore how they behave. But I don’t think ESG can have enough influence on capital costs to make a material difference in the real world. Many companies generate enough capital internally that their cost of equity or debt don’t matter much, and there is plenty of capital out there (most of it private) willing to sweep in and provide expensive capital to “dirty” companies.
Remember, a higher cost of capital for companies always means higher returns for investors (I make this and other arguments here, here, here, here and here, among other places).
If where investors put their money has such a limited influence on making the world a better place (however you might define “better”), then why should it matter if I decide to manage some wretched tyrant’s bond portfolio? Nangle is sensitive to this point, writing that:
Fund managers downing tools won’t stop torture, extrajudicial deaths or other awful things that some clients are responsible for. At most, denying them investment services might make odious regimes marginally poorer.
Now, investing in a dirty company and working for a dirty regime are different things with different impacts. But there is an underlying connection: just as refusing to own oil companies will not reduce the global supply of, or demand for, fossil fuels, refusing to manage despots’ cash won’t stop freedom fighters from getting murdered. So why should the prospect of the latter make me feel queasy?