ESG as Waving Banners and as Pulling Plows

Abstract

Environmental, social, and governance (ESG) investors who do no more than exclude stocks of fossil fuel producers from their portfolios are banner-minded; they want to do well and expect to earn market returns, if not higher. Banner-minded investors might want the expressive and emotional benefits of staying true to their values, but they are unwilling to sacrifice any portion of their utilitarian returns for these benefits. More importantly, they do no good, doing nothing to enhance the utilitarian, expressive, and emotional benefits of others. ESG investors who invest in housing for the homeless, however, are plow-minded; they want to do good and are willing to accept lower than market returns. Plow-minded investors want the expressive and emotional benefits of staying true to their values, and they are willing to sacrifice portions of their utilitarian returns for these benefits. More importantly, they do much good, enhancing the utilitarian, expressive, and emotional benefits of others. In the last few decades, the ESG movement lost its way as it transitioned from doing good to doing well and from plow-minded investors to banner-minded and pseudo-ESG investors. That transition expanded the ESG movement by adding investors but degraded the movement from doing good to doing well. It is time for the movement to regain its way, transitioning back from doing well to doing good, from banner-minded and pseudo-ESG investors to plow-minded investors, and from wants for utilitarian returns for oneself to wants for utilitarian, expressive, and emotional benefits for others.

TOPICS: Portfolio theory, ESG investing, portfolio construction

Key Findings

• • ESG investors wave banners when they do well for themselves, unwilling to sacrifice any investment returns for benefits to others.

• • ESG investors pull plows when they do good for others, willing to sacrifice some investment returns for benefits to others.

• • In recent decades the ESG movement lost its way as it turned from plow-minded investors to banner-minded ones. It is time for the movement to regain its way.