Very few financial advisors or asset managers ever meet a client who says he wants to invest in companies that pollute the environment, create toxic waste dumps, discriminate against employees or allow its board members and executives to loot the company.
Many do meet a client who says she doesn’t want to invest in those sorts of businesses.
It is true some clients and many investors are entranced by sin stocks, whether it be tobacco, alcohol, marijuana, gambling and—well, we won’t go any further. But Philip Morris was one of America’s greatest stocks from 1950 to 2000.
Brilliant marketing, the Marlboro Man, transformed what was a lady’s cigarette with a 1% market share into a macho man icon with a 30% share. I never owned Philip Morris shares. But truth be told, I smoked about 10 Marlboros a day for 10 years. Thankfully, I quit at 25 years old.
Today, the ESG (Environmental, Social, Governance) movement is riding high. ESG stocks have performed spectacularly during the pandemic. So-called green companies like the Big Tech giants are mopping up the American economy like Philip Morris once seduced a generation of 15-year-olds. It’s not a fair fight.
With its growing clout, ESG is going to be forced to grapple with its basic contradictions. Take a company like McDonald’s, which has a laudable record of employing young people and advancing persons of color. Offsetting this is the claim McDonald's steers its Black franchisees to poor, inner-city neighborhoods.
Watching the teamwork and fun that young employees display in the Mickey D’s in my neighborhood is a pleasure to behold. And five Big Macs a year won’t kill you. But the fact is that in the last two decades, two of the company’s CEOs, both of whom grew up in the McDonald’s ecosystem, didn’t make it to Medicare age.
ESG also comes with benefits. The cost of renewable energy is now cheaper than fossil fuels. Over the next two decades, America’s public utilities are expected to increase their profit margins by raising their use of renewables from 20% to 60% of all their energy consumption.
Like any investor, ESG proponents can get snookered, often in embarrassing ways. In 2010, many funds looked ridiculous holding BP shares in their portfolios as the Deepwater Horizon wreaked havoc on the Gulf of Mexico.
Even at its best, ESG also has its own attendant costs. President Biden has ambitious plans on climate change and they won’t be free.
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