The idea is that you can’t make intelligent and informed investment choices without understanding how companies deal with issues like equity, diversity and inclusion in the workplace, women’s access to reproductive health care and, of course, climate change. That is especially true for “fiduciaries” — those charged with making prudent decisions for others.
Fossil fuel companies like Exxon and Chevron, for example, have been enriched as global energy supplies were disrupted in response to Russia’s invasion of Ukraine. While the S&P 500 dropped more than 18 percent in 2022, energy was the only sector to rise, with a total return of almost 67 percent, with dividends.
For investors who held these companies in their portfolios, energy was a bright spot. I invest with broad low-cost index funds that hold the entire market. I therefore owned fractional shares of these companies. That was great for my returns.
But does that mean that fossil fuel companies are a good long-term bet in a time of global warming, or that people with a conscience should be heedless of the damage caused by burning oil, coal and gas?
Somehow, what economists call “externalities” — in this case, the environmental cost of burning carbon — need to be part of a fair analysis of these companies’ value. Market pricing isn’t doing the job.
The Role of E.S.G.
That’s where E.S.G. comes in. “There are many approaches within E.S.G. investing,” said Tim Smith, a senior policy adviser and founding staff member at the Interfaith Center for Corporate Responsibility, who was present at the creation of the socially responsible investing movement. “It’s now a very big tent.”
But what exactly constitutes a modern E.S.G. fund is open to dispute.
A year ago, early in the war in Ukraine, I pointed out that some stock analysts were arguing that to combat Russian aggression, the height of social responsibility required putting investment money into the stocks of companies that make weapons. That seemed absurd to the managers of many E.S.G. funds, which have, classically, eschewed weapons, above all else.