How to do good
EDITOR'S NOTE
We had a fiery discussion with Aswath Damodaran--the "Dean of Valuation"--yesterday about whether ESG investing actually achieves its societal goals, or not.
His points--which he initially laid out in a blog post here--are (1) Goodness is difficult to measure, and companies are just learning how to play the ESG "game" to get a good score; (2) Causality is an issue--are "good" companies actually more profitable, or are more profitable companies better able to take actions that make them look good? (3) It's unlikely that adding a constraint, like ESG, to any investing strategy results in superior returns, and (4), "Outsourcing your conscience is a salve, not a solution."
We will debate (1), (2), and (3) endlessly in the years ahead as ESG (which stands for Environmental, Social, Governance) investing gathers steam. So let me focus on his final point for a moment. I asked Professor Damodaran yesterday what he would tell his own NYU business students who want to use investing to improve society to do with their money, then. And he basically said, stop thinking that the stock market is a better way to change corporate behavior than your own personal actions.
"Start with your own decisions on what you consume now," Damodaran said. "Your choices ultimately drive what companies do. I think goodness starts at home. The danger I see with ESG is that by passing on this responsibility to companies and investment funds, people are going to go back to living their life saying 'I did my job, so I can drive my SUV, take as many flights as I want, and keep my house at 60 degrees'."
"Right now," he warned, "we're accepting a cosmetic version of goodness, instead of pushing for real change in companies that will only come about when our actions drive companies to behave better." Now, this might all sound to young students like eyeroll-Boomer talk. So let me assure them, he's absolutely right, with a quick story about Thelma Meyer.
Several years ago, when I was still living by myself in New York, I thought maybe I should be a little better at housekeeping. So at the bookstore one day, I picked up "Mrs. Meyer's Clean Home"--written by none other than the Thelma A. Meyer who inspired the hugely successful cleaning products company. The best part about the book, which has tons of cute and handy infographics and tips about how to clean, is realizing what an absolute force Mrs. Meyer was at home.
This lady had nine kids. In ten years. Including twins. (One of the kids went on to found the company.) The fact that aside from all that, she also was so frugal, like much of our older generations, that she would reuse washing machine water for more than once cycle, and pluck out the wet clothes with tongs just completely blew my mind. And that was before I ever had kids of my own! Now, I almost can't even fathom.
There are so many more examples in the book of what an incredible steward she was. Food never went to waste. Old dish clothes were stitched together into new ones. Plastic bags were rinsed out and reused. And none of this is told in a preachy way--half the time, it comes from one of her kids who shares their memories of growing up. Here's another example: "You're going to notice I don't suggest tossing too many things in the dryer. Dryers use a great deal of energy, which means big electricity bills. Hanging laundry to dry not only saves you money, it saves your clothes too: No shrinkage!"
Again, I read this now and think, great, we're running our dishwasher twice a day now and our dryer about six times a week. My point is, if you look at what's happening in society, it's basically a bunch of people noisily pushing governments and corporations to force everyone to behave like Mrs. Meyer did, causing huge backlash and controversy--instead of quietly making difficult personal sacrifices.
Professor Damodaran is right. I would have a much bigger impact on society if I ran my household like Mrs. Meyer's (less electricity usage! Less buying stuff at the store! Fewer restaurant and delivery trips!), than if I put my 401(k) into ESG funds that were little different from the S&P 500 without changing my behavior at home. But that's a lot harder sell as a political slogan or investing pitch.
See you at 1 p.m!
Kelly
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