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The Pros and Cons of ESG

By: Andrew J. Willms

President and CEO of The Milwaukee Company

Interest continues to grow in socially responsible investing (commonly referred to as “ESG”, (which stands for environmental, social, and governance). One recent estimate puts the total ESG-related investments worldwide at $250 billion, with the U.S. accounting for 20%. Moreover, a recent Morgan Stanley survey found nearly 95% of millennials are interested in ESG investing.

Fund providers anxious to capitalize on the ESG boom have created a wide range of exchange traded funds that cater to that market. Most recently Vanguard launched Vanguard ESG U.S. Corporate Bond ETF (VCEB) on September 24, 2020. The expense ratio is a measly 0.12%.

Generally speaking, there are two sorts of ESG funds: impact funds, which actively invest in businesses that the manager considers socially beneficial (such as solar power, racial justice, and workplace safety and diversity) and exclusionary funds, which simply avoid companies whose business activities the manager considers to have a negative impact on society (think guns, tobacco, petroleum, and boards of directors dominated by white men).

The idea that underlies ESG is compelling: they give investors the ability to align their investments with their personal values. Proponents of ESG funds also believe that investing in sustainable companies helps combat things like climate change, gender inequality, and social justice by providing a boost for businesses that operate in a socially conscious manner.

ESG is not without its critics. One concern is that there is no clear-cut definition of what constitutes ESG -- one manager’s devil is another man’s saint. Whether a liquor producer with an ethnically diverse board that provides high-paying and safe jobs to hundreds of people in a depressed area is regarded as socially responsible depends in large measure on one’s perspective.

Another is a concern that investing in unprofitable, unsustainable activities diverts limited financial resources into unsustainable business models. One often-cited example: The Obama administration invested billions of dollars in green energy producers that ended up going bankrupt.

It has also been suggested that an investor can do more good by maximizing the return on their portfolio, and using the excess return to do good. An ESG label has also been used to provide cover for managers who invest poorly, charge high fees, or both.

Personally, I think the choice to invest in ESG - or not - boils down to individual preferences. How a person feels he or she can do the most good: via charitable giving, socially-responsible investing, or a combination of both.

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