ESG Means Socially Responsible Investing, Not "Woke Capitalism"

It’s been labeled as woke capitalism, a scam, and a radical agenda. A $35 trillion global industry for ESG – doing well by doing good – is increasingly under attack.

It’s not clear how ESG became politicized, but it’s likely rooted in myriad causes: Criticism from corporate leaders who labeled ESG an “outrageous scam,” the political push to eliminate ESG from 401(k) plans, as well as the reality of greenwashing – misleading investors into thinking corporate products are planet-positive when, in fact, they are doing more harm than good.

The steady drumbeat of doubts about ESG’s value in recent years has certainly hurt the integrity of this framework. But does it mean the framework is entirely flawed?

At RFK Compass Investors, we firmly support investments aligned with environmental, social, and governance principles. That approach certainly has demonstrated ESG’s value as a competitive financial return. More importantly, though, when properly executed it forces us to seek out products, services, and business practices that change our institutional governance systems for the better, alter the way we treat our planet, and uplift the most vulnerable people in our economies.

The ESG framework currently is the only way to strategically drive financial investments and corporate spending that’s also sustainable and refinable in the long-term in order to create a more equitable world for generations to come. Making that vision a reality is at the core of the RFK Compass Investors program.

And the numbers don’t lie. Investors – including the many who attended our summer conference – understand that ESG investments provide a sustainable path to long-term returns. More than half of ESG funds outperformed the S&P 500 index in the first several months of 2021, according to data provider S&P Global. That trend has continued into this year, even as global markets slump. Compounded over time, it adds up significantly to help pension plan fiduciaries reach their long-term investment goals.

Planning for the long-term can be challenging for investors, especially those who oversee municipal- and state-level pension funds, when ESG is weaponized in the political theater. While that approach is, at best, short-sighted, the bigger concern is it eroding the fiduciary’s decision power to effectively manage employees’ retirement funds.

This is precisely why the world’s largest asset manager, BlackRock, is embracing ESG as a long-term trend. BlackRock, which manages $10 trillion in assets, has noted that there’s a global reallocation of capital toward sustainable companies. BlackRock chairman and chief executive Larry Fink has weighed in on what his firm calls a “tectonic shift to sustainable investing,” which is only accelerating. Fink wrote in his 2022 letter to CEOs that capital allocation decisions are not political but, as Fink says, rooted in “...capitalism, driven by mutually beneficial relationships between you and the employees, customers, suppliers, and communities your company relies on to prosper.”

There may be a silver lining to all the fiery rhetoric. The increased public and political scrutiny reminds investors to reconsider what comprises a responsible investment. For many, that means eschewing companies’ claims of corporate and social responsibility for actual ESG bona fides based on data and facts gathered through an analytical screening process. The higher bar is good for the industry; it also means more ESG investments will be vetted and anchored in research and data, including on important themes like human rights.

“Rather than abandoning social and human rights metrics, investment managers need to give them greater attention,” RFK Human Rights board member Michael Posner wrote in a recent Forbes op-ed. “This means more sharply defining the scope of social concerns and focusing on areas where global business models are resulting in human hardship and then gathering better data.”

In short, it’s not a matter of being “woke” but rather thinking about how our actions as investors affect society – no matter where we stand politically.

The need is critical. The massive floods in Pakistan, for example, have killed more than 1,400 people and displaced at least 13,000 more; Puerto Rico has experienced another devastating hurricane that has affected thousands of island residents and further burdened the U.S. territory’s fragile infrastructure.

The environmental changes contributing to such disasters are unavoidable and touch everything in our lives, from supply chains and the workforce to where we live and what we eat. It’s reckless to believe our portfolios will be all that’s left untouched.

Companies and investors don't exist in a bubble, and we shouldn’t act as if we do. Let’s move the conversation to a more constructive footing and talk about how we can improve the metrics and data used to screen investment decisions for ESG considerations instead of whether or not to do it at all.

Do your part by getting involved in RFK Compass Investors and keeping the dialogue going – especially with those with viewpoints divergent from your own.