Investing According to Your Values?

 

Investing according to one’s non-financial values seems to be a growing trend.  Money magazine reported in its November issue that sustainable funds (defined in the article as environmental-, social-, and governance-focused, or ESG, investments) in the U.S. took in a record $70 billion in new money in 2021, up 35 % from 2020.

The article in Money also noted, however, that the trend has attracted some negative attention in the form of some states’ attorneys-general who are accusing ESG fund managers of letting a political agenda drive their investment decisions rather than the financial wellbeing of their clients.

I’m not going to jump into that debate.  I find it perfectly acceptable, commendable even, that someone would want to invest according to his values and principles.  And if environmental issues are important to you, then by all means you should have the freedom or even the responsibility to put your money into companies that promote your values.  Conversely, if I think Exxon is a good investment and I don’t care if they produce and sell fossil fuels, I should have the freedom to invest in Exxon.

But I do have more than a little skepticism about value investing in general.  It is much harder to adhere to one’s values in the investment world than one might think.  Let’s use environmentalism as an example.

Perhaps you’ve heard some of the extraordinary claims made by some companies about the progress they have made to become more environmentally friendly.  Bloomberg this week cited several:

“Proctor & Gamble vowed to cut its heat-trapping emissions in half by 2030, before announcing it had surpassed its target a decade early.”

“Cisco Systems Inc. recently said it had exceeded a goal to reduce its climate pollution by 60% over 15 years.”

“Continental AG, the German tire and auto parts juggernaut, claimed it had slashed greenhouse gases by an astounding 70% in 2020.”

Wow, I’m breathing easier already.

Or not.  Because Bloomberg Green’s investigation showed that the reductions were more like 12% for P&G, 8% for Continental AG, and a 22% INCREASE in emissions at Cisco.

What gives?

It boils down to an accounting trick—or (some heavily polluted) smoke and mirrors, if you will.  Each of those companies used what is called market-based accounting when calculating their climate impact.  Under this bookkeeping method, a company can purchase credits from clean energy providers so they can lay claim to burning clean energy and show a reduction in emissions to investors.  The clean energy may have been used by another company—or even you!—but they take the credit for cleaning up the world.  And these are just three companies among hundreds or even thousands that use this widely accepted methodology.  Nor does the misdirection end there.

Inside Climate News last week ran an article about the supposedly vanishing emissions generated by fossil fuel companies.  Under pressure from value investors who are pushing for greener practices, these energy companies are divesting from some of their older and dirtier assets likes wells and coal plants.  But as the magazine points out, private equity firms are eagerly snatching up these assets.  After all, the war in Ukraine has proven we still desperately need, and will pay top dollar for, fossil fuels.  Europe and the U.S. are scrambling to find secure sources of natural gas and oil, not solar panels.  These privately held companies do not have the investor pressure to clean up the environment and are exempt from many of the financial reporting rules governing publicly traded companies.  As long as they are making money—and I’ve got to believe in the current state of affairs they are—these private firms will continue to run these higher polluting assets, probably for much longer than the original owners would have.  The net result is a greener ConocoPhillips or Shell or BP, but a dirtier world. 

Is nothing what it appears to be?  What’s a conscientious value investor to do?  Next week I will continue on this topic, bring it closer to the level of personal finances, and offer what you may find to be an unpalatable take on the whole subject of value investing.

Until next time,

Roger

“Save me, Lord!  There are no good men left, and honest men can no longer be found.  All men lie to one another and deceive each other with flattery.”  Psalm 12:1,2 Today’s English Version