The Intrinsic Futility of ES(G) Investing

If a shunned company gets cheap enough, it obviously becomes more likely to get taken private, further removing it from public scrutiny. In this regard, the recent ExxonMobil board insurrection led by Engine No. 1 is instructive, demonstrating how even small outside shareholders can curtail further drilling for fossil fuel. Good luck trying that with Koch Industries. Observers of the oil industry have recently noticed, for example, that while publicly traded companies have radically curtailed exploration, the slack has been taken up by private ones.

All of which suggests a better way of how investors can make the world a better place: continue to hold sinful companies in cap-weighted fashion, preferably in a passive fund, and assign the excess returns that accrue to those companies to advocacy, particularly of the sort pioneered by Engine No. 1. One way to do this is through Engine No.1’s VOTE ETF.

One more thing: the sharp-eyed will notice that I put the “G” in the title in parentheses. While I’m dubious about socially and environmentally responsible investing, attention to corporate governance will probably benefit your returns. Starting with the South Sea Bubble of 1719–1720, the history of finance is rife with corporate executives who treated their companies as their private piggy banks, from South Sea’s notorious John Blunt to the rogue gallery of Enron’s leadership, who freely spent their shareholders’ money on corporate jets, mansions, and other luxuries. (Its huge fleet of high-end aircraft was known inside the company as the “Lay family taxi” because of its deployment for shuttling around Chairman Ken Lay’s children to and from social events.) If you put a gun to my head and forced me to pick stocks, my first criteria would eliminate all companies whose executives made extensive personal use of corporate aircraft or who had bought eight-figure real estate, factors which have been shown to knock double digit percents off of stock returns.

I don’t know of a more useful rule of thumb in finance than this: The more investors are aware of a particular company or asset class, the more capital gets thrown at it, and so the lower the long-term returns will be. (This truism never fails to remind me of Peter Lynch’s favorite stock: Crown Cork & Seal.)

At a time when every fund salesman and their dog is hawking ESG, now is a great time to stay away.

William J. Bernstein is a neurologist, co-founder of Efficient Frontier Advisors, an investment management firm, and has written several titles on finance and economic history. He has contributed to the peer-reviewed finance literature and has written for several national publications, including Money Magazine and The Wall Street Journal. He has produced several finance titles, and four volumes of history, The Birth of Plenty, A Splendid Exchange, Masters of the Word, and The Delusions of Crowds about, respectively, the economic growth inflection of the early 19th century, the history of world trade, the effects of access to technology on human relations and politics, and financial and religious mass manias. He was also the 2017 winner of the James R. Vertin Award from CFA Institute.

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