Chuck Underwood, in an interview last year, said Millennials inherited their core values from their Baby Boomer parents. Underwood, host of the PBS national-television series America’s Generations With Chuck Underwood has been called “one of the half-dozen pioneers who created and then popularized the discipline of generational studies.”
He spoke at the New York State Press Association Publishers Conference in Montreal last fall. What he said there goes a long way to explaining some of the headline articles you’ve been reading lately. And maybe why you should be wary of the particular investment fad those headlines tout.
Socially responsible investing is not a new term, nor is it an untested investment strategy. Two things have changed since its emergence as an activist initiative in the 1980s and the then contemporary academic studies that concluded it was an underperforming strategy.
First, investors’ natures have changed. As Underwood tells it, both Gen-Xers and Millennials “have been burned” by Wall Street, whose “greed and corruption have savaged their lives.”
Don’t think the investment industry hasn’t noticed this. And don’t think they haven’t figured out a way to address this cynicism. In fact, it’s very possible, whether intentional or not, Wall Street is applying a jiu-jitsu move on Millennials.
The second change explains why.
As Underwood understands it, Baby Boomers have now replaced the Silent Generation in America’s leadership arena. Under their leadership, corporate America appears poised to seize upon opportunities to make bold statements of social activism. If done correctly, these ventures can emerge as marketing home runs.
Because Millennials, now the nation’s biggest market and prime audience, according to Underwood share many of the same social activist core values as their Baby Boomer parents. If corporate leadership, (i.e., Baby Boomers), can successfully forge products into positions that coincide with these shared core values, it would be like throwing gasoline on the marketing fire.
One of those shared core values has emerged to become the popular ESG-based investment philosophy. (“ESG” refers to broad “environmental,” “social” and “governance” factors.) More sophisticated than its narrowly focused 1980s counterpart, you see ESG growing in acceptance with every article you read. Several studies purport to show ESG-based investing yields greater returns. Others claim the opposite.
So far, the sizzle of ESG has outshone the steak of actual results.
Securities and Exchange Commissioner Hester Peirce’s recent speech to the American Enterprise Institute may have been the ESG movement’s “Emperor Has No Clothes” moment. Lamenting the nebulous nature of the strategy, she said “E, S, and G tend to travel in a pack these days, which makes it hard to establish reliable metrics.”
While admitting, “It is true that ESG issues may well be relevant to a company’s long-term financial value.” Peirce warns of “a growing group of self-identified ESG experts that produce ESG ratings. ESG scorers come in many varieties, but it is a lucrative business for the successful ones.”
Consider the word “lucrative.” This suggests how tapping into the marketplace’s core values can yield monetary rewards. A product cannot become “lucrative” unless a demand for it exists. A demand will exist when it coincides with the market’s core values.
Returning to Underwood, if Millennials look at Wall Street with a cynical eye, how might Wall Street respond to return to their good graces? They’d do it by repositioning their products to coincide with Millennials’ core values. ESG, therefore, offers a perfect opportunity. Indeed, it you count the headlines, you’ll see interest in ESG has accelerated.
Peirce recognizes “more investors, investment advisers, and companies embrace ESG,” but also notes “questions about what ESG means for returns are also gaining attention.”
“Why, then, must the word ‘ESG’ must be used at all?” asks Peirce. “…If ESG disclosures mean disclosing what is financially material, there is little controversy, but the ESG tent seems to house a shifting set of trendy issues of the day, many of which are not material to investors, even if they are the subject of popular discourse.”
Here’s an example of a headline that might explain why “ESG” must be used: “An ESG Fund in Name Only.” This article exposes the problem with ESG: poor performing mutual funds are being reframed as “ESG” funds. It’s now a marketing gimmick rather than a true tool of social activism.
And when that becomes the case, it’s caveat emptor for all investors. Yes, regarding ESG the “buyer beware” light is flashing.
To use an analogy, Millennials need to examine how much of their donation is actually going to the cause and how much is going to pay for the charity’s expense account.
And therein lies the hope of this generation. If Chuck Underwood is correct, they have it within them to avoid risking their retirement on any investment gimmick.
“The younger generations are very savvy consumers,” says Underwood. “They’ve heard every marketing and advertising hustle. So their message to Wall Street is: Show me. Prove it.”
ESG-based investing can’t rely on back-testing to justify its existence. It will require several years more of actual market-tested results to prove its true value to investors.