Musta Got Lost

What J. Geils and other Boston rockers teach us about investing with values

In a free, capitalist society the idea that I can invest my personal savings, or an organization can allocate capital as I or the organization see fit, must hold true. That’s my choice, even if “you might think it’s foolish,” as Rick Ocasek of The Cars said in the 1984 classic, “You Might Think.” Yes, to be sure, laws and regulations circumscribe actions, and important rules must be followed around truth in financial product labeling and corporate governance and investment management. Nonetheless, the basic premise—it’s my money, so it’s my decision—should hold universally.

That belief is the bedrock not only for our capitalist society, but also for values-based investment decisions that have been made for decades by conservative institutions like the Methodist Church, who does not invest in companies that make birth control, and liberal organizations like the Nature Conservancy, who does not invest in coal mining. It’s also why both organizations can—and have—decided to restrict investments in companies making ammunition.

Running parallel to that argument is that consumers and business owners have a right to make purchases and management decisions consistent with the values of their customers or a majority of their shareholders, with the caveat of course that they respect their responsibilities as fiduciaries. An investor can rightfully make a decision to put Tesla or Ford in their investment portfolio informed by each company’s decision to pay employees at union scale in Detroit or free market wages in Austin, Texas. Consumers have the right to buy a car, or not, from either one for the same reasons. Taken together, those two ideas create the framework for a capitalist economy, a framework that enables informed decision-making and values based investing.

If we can all agree on that thesis, then how is it that we’ve reached a point where being an astute investor while also doing good by our neighbor is such a contentious issue?

First, we have to acknowledge that these are not new ideas—a framework for values based investing is not a politicized fad of the last 20 years. There is, as the Boston-based post-punk band Mission of Burma suggests in their song “Progress,” a lineage of people advocating for it (“I’d like to think that down through time/they’d compose a logical line”), starting with the Anglican Priest and founder of the modern day Methodist Church, John Wesley, who discussed it in a sermon with the title “The Use of Money.” In modern times, we can look to Reverend Leon Sullivan, a member of the General Motors Board of Directors, who drafted the Sullivan Principles in 1977 to guide business dealings in South Africa under apartheid. Ten years later, the World Commission on Environment and Development published the Brundtland Report, which eventually became what we know today as the Sustainable Development Goals. And that led to “ESG” investing.

Most importantly, managing capital and conducting business in line with societal norms, contrary to current heated rhetoric, is not a fringe idea. Even Milton Friedman, whose essay “The Social Responsibility of Business Is to Increase Its Profits” is taken as gospel by some, was not blind to the fact that businesses operate within society. Friedman did believe that a corporate manager has a responsibility to “conduct business . . . to make as much money as possible.” He also believed business should be done “while conforming to the basic rules of society, both those embodied in law and those embodied in ethical custom.” Those two clauses were written together, intentionally, although in my experience, most people who quote him in defense of their own actions seem to forget this last clause, or maybe they never read past the title.

So, if values-based investing has been accepted and conducted for hundreds of years, then why does everyone have their knickers in a twist over the issue? As usual, I turn to music, and this time, my hometown, for answers from some of the most influential Boston rockers of the late 20th century.

“Musta Got Lost,” J. Geils Band (the best thing to come out of Worcester, MA since the Table Talk Pie Company)

I think that four things happened, actually, two of which happened in good faith.

The first and most important is that the alignment of investment decisions became confused with investment decisions. Companies are being analyzed for characteristics that have a lot to do with broadly defined beliefs in a “better” world, but often have very little to do with each company’s actual business. Proponents of environmental stewardship, for example, began comparing the carbon emissions of all companies and favoring those with relatively lower emissions. To be clear, there’s nothing wrong with that, and many, including me, would support it—for certain companies whose earnings respond authentically to climate risks. If that is your fund’s specific mandate and that’s what you told investors you would do, then it’s fair game. But expecting lower carbon emissions to drive higher earnings across all companies in all sectors is a bit far fetched.

The second thing that happened was, well, data. Companies like MSCI and Sustainalytics started analyzing all kinds of company attributes and creating data sets that were so carefully designed to align with value issues that nobody questioned the financial relevance of the metrics. And they made the analysis easy—with literally a few clicks the first year MBA associate on your team could upload a portfolio, choose a few important “issues to be aligned with,” and run a report telling everyone how “well” your portfolio was performing against some benchmark. Presto, the fund manager could confidently announce that they were saving the world by owning Coke instead of Pepsi, or vice versa, depending on which ESG vendor supplied you with the data.

As the J. Geils Band lead vocalist Peter Wolf said, “we musta got lost.” A misguided mission and an accelerated path are a sure way to take even the most passionate professionals off track. And from there, we veered way off course.

“Talkin’ (too much) Bout a Revolution,” Tracy Chapman (Yes, she was born in Cleveland, but was discovered on the MBTA Red Line in Boston)

The third thing that happened was that marketing people at the asset management firms got involved and raised enormous amounts of assets for these strategies. Investment firms gladly embraced and enabled those strategies and quickly started selling the story about all this great change on the horizon. Then we realized that the revolution was something less than we’d hoped for, that in fact most of those funds were just delivering the status quo with a tweak. Yes, ESG frameworks were born of a justified and intentional desire to use capital to address the problems in the world. But in their fervor to direct capital to a higher use, a lot of ESG investors forgot about the investing part.

“Nobody’s Fault,” Aerosmith (New Hampshire is close enough)

There’s a fourth issue which occurred at the same time when—everyone, it seemed—professional investors, journalists and academics, started using the term “ESG investing” to describe any and all values based investing. The confusion was so apparent that Elizabeth Pollman at The University of Pennsylvania’s Institute for Law and Economics took it upon herself to write something called “The Making and Meaning of ESG.”

Think about that for a hot second. The ideas underlying ESG were so misunderstood that a tenured professor at one of the nation’s most respected law schools wrote 47 pages with 277 footnotes to explain “what happened and how we got here.” Her conclusion was neither surprising nor comforting:

“ . . . the flexibility and big tent approach of the term ESG, and its facilitation of claims of alignment between value and values, are at once part of the success story in diffusing ESG widely and forming a diverse movement of proponents . . . However, these very features that have fostered a global dialogue, attracted trillions of investment dollars, and fueled regulatory reform, are also the source of challenges and critiques that have emerged and will continue into the foreseeable future.”

In other words, as Aerosmith’s dynamic duo Steve Tyler and Joe Perry wrote, “we did an awful job and now they say it’s nobody’s fault.”

“More Than A Feeling,” Boston (with a happy belated birthday to founder Tom Scholz)

A lot needs to be addressed before we can confidently implement the concepts behind ESG investing, as well as its cousin, Sustainability. That doesn’t mean values-based investing is to be set aside, or tossed into the dust bin. In fact, those faults are why many advocates of values based investing have turned to the less known but well established field of impact investing. Why? Because impact investing is investing.

Ask any fundamental investor what to look for and they will likely tell you that as a core thesis, we look for three things:

A technology / process / innovation solving a problem

A large market for the solution

A strong leadership team

That’s exactly what impact investors do, we simply have a narrower lens for the first issue, and are looking for a specific set of problems to be solved. We are passionate about the planet and people, and we know that to make change happen, we need scale. And that means, simply, that the solution has to be grounded in financial reality—it has to be, in Boston’s immortal words, “more than a feeling.”