Ep.70 ESG INVESTING with JOHN ROSENBERG

For a few years, the wealth advisory and asset management worlds have been captivated by three letters . . . ESG: Environmental, Social, and Governance. ESG has been an exploding trend as investors want to align their personal values with their investments. The principle is that one’s investments can do well by “doing good.” Against that backdrop, asset managers are looking for new criteria to evaluate investment opportunities in the context of ever increasing difficulties in beating indexes over time. To some, ESG is a marketing gambit. To others, it is a framework to unlock greater returns and create positive social impact while doing it. To many, it is somewhere in between.

To help make sense of this phenomenon, I spoke with John Rosenberg who has direct experience in asset management and the ESG world.

John worked for the Federal Reserve Bank of San Francisco and has had a long career in banking and now works as an investment manager at a single family office and manages the LOUGHLIN WATER PARTNERS LP – an investment fund focused on technologies and assets that provide clean water and alternative energy. (Early on, John worked as a ski bum which he declares to be the most honest job on the resume!)

Outline

Could you give me some background on ESG Investing? We hear a lot of different terms bandied about such as Sustainable, Impact, ESG, or even SRI. Where did the term come from and how has it evolved?

Are ESG stocks different from other stocks? Is there some particular differentiation? Are the letters all equal?

A few weeks ago marked the 50th Anniversary of the Milton Friedman’s essay on Shareholder Theory where he states that the corporation’s social responsibility should be focused on profits. (The Social Responsibility of Business is to Increase its Profits). Do you agree with that?

What is the driving theory behind ESG investing? Do you believe it actually promotes virtuous behavior? How do you parse the difference between a company that does many things well, but has a problem underpinning it’s ESG score (i.e. tobacco bonds that fund good causes, but have dubious sources of revenue or a top notch company with an executive with a checkered record?)

Are there data services to evaluate whether or not companies are engaging in responsible behavior? How does one deal with one data service vs another? How much of the analysis is qualitative? How do you get past the “check the box” or “greenwashing” phenomenon?

You have been doing this, in one form, for a while now. What do you think of new entrants to the space?

Jeff Uben, formerly of Value Act, made some comments critical of ESG investors awhile back. What do you think about that?  https://www.barrons.com/articles/activist-investor-jeff-ubben-departs-valueact-to-focus-on-esg-51592936937

Do you think we are entering our could enter an ESG Bubble much like every other style of investing that catches on? Are the ESG criteria factorable and therefore quickly assimilated into indexes?

ESG- Fad, Trend, or Is It Here to Stay?

Fun Question.

Additional reading on the pros and cons of ESG in investment performance and the role of corporations and the assimilation of ESG principles.

Morningstar indicates that ESG Funds Outperform Their Indexes

How Strong are the Links between ESG factors and Outperformance?

Wharton: Why ESG Investors are Happy to Settle for Lower Returns