|n the days since George Floyd’s death prompted widespread protests over racial inequality, ESG investments, often known as “socially responsible” funds have seen a groundswell of new investment. ESG (Environmental, Social, and Governance) index investing is now predicted to double in 2020 in assets under management.1 |
At the end of 2019, ESG considerations were a factor in almost $1 trillion invested.2 But do these good intentions actually result in socially responsible investments? If you actually care whether your money is being invested in companies that reflect your values, it pays to look beyond the flashy ESG label.
In 2004, I wrote the first paper for the World Economic Forum on the business case for women and diversity3. Since I wrote my paper, the World Economic Forum launched its highly regarded Gender research and McKinsey, Credit Suisse, and other prestigious firms have shown statistically that diverse teams result in better financial outcomes. But has the financial industry taken any real steps to diversifying? Given my experience and statistics, too often diversity claims are just lipstick on a pig. ESG investments are often anything but socially progressive.
A public company named MSCI, which was spun out of Morgan Stanley, has become the de facto entity which sets the industry benchmark for ESG index and active funds.
MSCI designed this index to “maximize exposure to positive environmental, social and governance (ESG) factors while exhibiting risk and return characteristics similar to those of the MSCI USA Index.”4 That sounds great on paper, but the reality is not as righteous.
While the ESG index excludes tobacco and weapons producers and claims it is “sector-diversified and targets high ESG ratings in each sector”, index composition is closer to a broad ETF. Even worse, the top companies on the MSCI list have been in the spotlight for a noticeable lack of racial and gender diversity in the workplace.
The MSCI ESG index is topped by Microsoft, which Forbes criticized for its “grim” diversity statistics: much like the tech sector at large, Microsoft’s workplace is over 75% male and 60% white, while Apple and Amazon offer similarly homogeneous environments.5 Microsoft’s CEO recommended that “women shouldn’t ask for raises, and instead, rely on karma to propel their careers forward” – as of fall 2019, Microsoft women were still in legal battles for pay equity.6 Recently, Microsoft’s black employees leaked memos to the media in order to pressure their CEO to support Black Lives Matter.7
In contrast, another software billionaire Marc Benioff, CEO of Salesforce, led a San Francisco tax on big companies to combat homelessness and to publicly pay women equal to men, yet this company does not show up on the top investments for socially responsible investment indices. Actively managed ESG funds did not show a substantial different in investments than passively-invested funds that track the ESG index. Forbes calculated that the $2.3 billion held in actively managed ESG mutual funds had its largest holdings in Microsoft, Alphabet, Amazon, and Apple.8
While inclusivity in the tech industry earlier is bad, diversity in wealth management is worse. Nearly nine in ten financial advisors are white. Women represent only 14% of financial executives, but 67% of support staff.9 Moreover, just 1% of assets are managed by women or minorities. That percentage hasn’t budged since the early 1970s!10
Given these statistics, investors who actually care about diversity should look under the hood of their ESG providers. Take Morgan Stanley, a firm which paints itself as a leader in ESG. On June 18, former Morgan Stanley Chief of Diversity Marilyn Booker sued the company for racial discrimination and harassment. Booker claims Morgan Stanley offered only superficial support to her diversity efforts, and never took seriously the importance of fostering an inclusive workplace.11
If you care about social justice, you need to work harder to find an advisor who is truly committed to diversity. Moreover, it takes more work for your advisor to find companies that both reflect your values and can provide you a substantial return.
How diverse is your financial advisor team and how did they perform in growing and protecting your savings?
But there is a reward for your diligence: it is possible to outperform the market by working with a professional to target your socially responsible investments. Investors who recognized my talent despite my “non-traditional package” have been rewarded — my clients’ portfolios are up 12% for the first half of this year vs. -3% for the US stock market index and -7% for the world index.12 For 2020 and 2019, my portfolio performance has beat by 30% Bridgewater, the world’s largest hedge fund which is now being sued for gender discrimination by its former CIO.13
3. Joelson, Marisa. “Why the Advancement of Women is Strategically (and Not Just Politically) Correct.” World Economic Forum. 2004.
4. MSCI Index. https://www.msci.com/documents/10199/0bd7923e-e2d0-f83a-701b-2f9bfc03eb65
12. These are equally-weighted returns for all of my clients who have invested over $1M with me.