In the 5th century BCE, Sparta once outright banned money. You may be thinking, as did I—why on earth would anyone ban money?
Spartan ruler, Lycurgus, known for his “morality” thought that theft, envy and overindulgence were byproducts of owning wealth. In other words, money and morality were antonyms. So, he illegalized gold and silver, effectively devaluing it. Then, he took property from wealthy landowners and divided it between all people because, “arrogance and envy, luxury and crime, resulted from this unequal distribution of property.” As the story goes, “merit, not money, became the only measure of a man's worth…[and] robbery and bribery vanished from Sparta instantly.”
It seems far-fetched. After all, Lycurgus’ very existence is debated. But this “moral” style of rule distinguished Spartans from the rest of Ancient Greece. (It gave them that “300” swagger we recognize today). Aside from violent Hollywood pantomimes, Sparta left us a pondering question: is there a correct mix of morals and money?
The answer is likely somewhere between “it’s complicated” and “it depends on who you ask.” But in the investment world, many know a way to put your money where your morals are.
ESG (Environmental, Social, Governance) investing goes by many pseudonyms: sustainable investing, responsible investing, impact investing, to name a few. ESGs make up an estimated 40 trillion dollars—up from 30 trillion just two years ago, according to Opimas. CNBC said that Social Index funds alone have “topped $250 billion, and the U.S. market is now 20% of the total.”
ESG companies declare their allegiance to green efforts, diversity standards and fair working conditions. They also cleverly position themselves against so-called “sin” stocks. These include organizations that might manufacture alcohol or tobacco, produce nuclear power or own fossil fuel reserves.
All of this is great, but the questions remain: why are ESGs suddenly popular? Are there just more conscious people these days?
One could make that argument. As Gen Z (born after 1997) and millennials quietly gain a larger share of the market, more corporations are looking to accommodate them. These new kids on the block are more mindful of where their money goes— especially considering their struggles with school debt, low wages and sparse employment opportunities. But they are also interested in investing with a moral compass in hand. And since millennials and Gen-Z make up 30% of the investor base, businesses across the board are compelled to meet their demands. And thus, the list of ESG companies keeps growing.
The rising interest in responsible investing can also be attributed to a mass letter sent out from BlackRock CEO, Larry Fink. In it, he declares “awareness is rapidly changing, and I believe we are on the edge of a fundamental reshaping of finance.” Fink says BlackRock clients are becoming increasingly interested in conscious investing. He adds that it would behoove all CEOs to get in rhythm with the times. The letter goes on, “climate risk is investment risk” and continues “we believe that sustainable investing is the strongest foundation for client portfolios going forward.” He also calls on business owners to embrace “increased transparency” to shareholders, coming clean about their sustainable efforts. He says, “Disclosure should be a means to achieving a more sustainable and inclusive capitalism.” This helps them remain accountable for their business practices and ethics.
The letter was sent out in the beginning of 2020, and the list of ESG companies has skyrocketed since. Funny enough, these socially responsible funds now include goliath companies like Nike.
Now, I am old enough to remember when Nike was famous for using child sweatshops for production. Not to pick on them, but that doesn’t appear to be a qualification of an ethically conscious company.
But according to John Rotonti in a Motley Fool article, Nike is a leader in environmental sustainability as proven by their “chief sustainability officer” who is charged with overseeing environmental efforts. Rotonti gushes, “…any interested investors should read Nike's latest sustainability report, which uses the GRI framework, the Sustainability Accounting Standards Board (SASB), and the United Nations' Sustainable Development Goals (SDG) -- all great examples of the valuable data that ESG investors should look for.”
Maybe the snag here is that morality is inherently subjective. That means, what is good and not good depends on who you ask. And apparently, if you ask Mr. Rotonti about Nike, he’ll give you two giant thumbs up. But it makes you wonder if these corporations push these “responsible” initiatives to balance out the stuff they do behind the curtain. Is ESG just another way for companies to appeal to your conscience? If the criteria to be considered “ESG” is that you have to cater to one letter (in Nike’s case, the “E”) and not the other—are we still investing with our morals?
At the very least, it does pose a valuable question about how you think of morals and money. A question we all must eventually answer.
On a final note, one way to align your portfolio with your conscience is to examine companies individually—and there are a few websites that can help.
For instance, check out Know the Chain. They provide insight into how certain companies within supply chains treat workers. Here, you can look up sources within your portfolio and review their worker protection practices. Know the Origin practices a similar idea. All of their clothes are sourced from organizations that abide by, for example, certain chemical management standards, low emissions efforts, provide good wages and more. Here you can vet and add certain companies into and out of your ESG portfolio, based on this organization’s ideal standards.
There are thousands of related sites. And you could learn a lot from doing just a little homework.
Overall, despite criticisms, ESG investing deserves credit for turning the general market into a more ethical place. Even though the practices behind every company isn’t known, it doesn’t negate that they are at least compelled to act in our societal interests. And that is thanks to the morals and virtues of the common investor. Though it may not be a satisfactory measure for someone like Lycurgus, it’s certainly a good start.