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Rights and Responsibilities

We should be encouraging ESG, not mocking it.

Don Phillips, 12/01/2015

Environmental, social, and governance, or ESG, concerns are often presented as liberal forces combating the evils of Big Business to somehow make the ugly activity of investing more palatable to good-hearted individuals. This view has been strengthened by right-wing opponents of ESG, such as a noted U.S. business periodical that has long derided ESG investing approaches, claiming that investors should invest for maximum gain and if they feel guilty about how those gains were won to simply make a charitable donation out of some of their winnings to ease their conscience. To me, this explanation of ESG gets it dead wrong, being founded on false premises, most notably that investing is a somehow tainted activity that needs to be cleaned up.

I believe that investing itself is a socially conscious act. It means deferring gratification today for greater security and opportunity for yourself and your loved ones tomorrow. It is, quite simply, what a responsible adult does. Those who can invest and don’t do so, such as Vice President Joe Biden, who boasts (falsely) of owning no stock or bonds, are in my eyes irresponsible and poor role models. Conversely, those who step up and embrace the responsibility of becoming investors deserve our respect and should be entitled to fundamental rights as responsible citizens. Our society benefits from having more investors, not fewer.

The Investment Company Act of 1940, the legislation on which the U.S. fund business is based, embraces this notion of investors’ rights, choosing a corporate organization of investment companies, rather than investment products, for these vehicles. In embracing the corporate structure, the act defines investors as owners and gives them advocates in the form of a predominantly independent board of directors to represent their interests to the management company that is employed to run the fund. That view is utterly different from the product view of funds where manufacturers make product, which is sold through distribution channels to consumers. Owners have rights; consumers are prey, hence the phrase “buyer beware.” Those that treat investors as owners bestow upon them the respect due to those who accept the responsibility of planning for tomorrow rather than just living for today.

Chief among these rights that those responsible individuals who become investors are due is transparency and choice about how their money is invested. They have a right to know who is running the businesses they invest in, what practices they deploy in managing those businesses, and what consequences those activities have on the world in which they operate. Investors have the absolute right to choose which activities they are comfortable embracing and which they desire to avoid. They do not have to buy every stock in the market just because some academic believes buying the whole market is the sainted way to invest. They can—and should—direct their hard-earned money in the ways that they choose.

Of course, that’s not always an easy task. It takes great effort to uncover all the activities in which even a single business is engaged. The research for a diversified portfolio of investments can be daunting. Fortunately, the market increasingly offers assistance, as firms are stepping up to provide insights into the practices of different businesses. Morningstar will soon aggregate the insights of one such firm, Sustainalytics, to offer fund investors insights into the ESG footprint of the funds they consider for their portfolios. To me, this transparency is wholly in keeping with the rights due to those individuals responsible enough to live within their means and save and invest for the future.

ESG is a great and powerful movement, not because it rights some wrong inherent in business, but because it removes obstacles that keep people from investing. It’s far too easy an excuse to not save for tomorrow because you think investing supports causes you dislike. ESG research empowers investors to make more informed choices, to better align their money with their values, which is their right to do. It gives investors a louder voice to corporate leaders. Over time, the practice, which today is in its infancy, will evolve and become more sophisticated. In the process, it will lead to better behavior and increased accountability. But already it is a powerful force that appropriately reflects investor rights. And that is a very responsible thing.


Don Phillips is a managing director of Morningstar, Inc.

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