Chris Farrell: How to sort through the clamor of ESG investing

I've long argued for people to use their "giving" framework when investing.

The questions we ask when we give away money — how my giving can reflect my values — are the same questions we should ask when investing.

The holiday season and the dawn of the New Year is an opportune time to make the effort to better align our giving and investing habits. (The same holds with spending, but that's for another column.)

The task of investing with a conscience has become harder. Environmental, social and governance — better known as ESG — attracted trillions of investment dollars in recent decades. ESG is the main strategy for investing with values. But ESG is going through a time of hard reflection at best and an existential crisis at worst.

A backlash has erupted in some Republican circles. Florida, Texas and Missouri are among the states taking aim at ESG.

But anti-ESG politics mostly misses the mark. Far more serious is the realization that the data and measurements supporting ESG are too vague, too ill-defined and too contradictory.

That doesn't mean abandoning investing with values. The risk of climate change is real and it's critical to create incentives for companies to take their impact on the environment into account. For instance, rather than abandon the idea a recent special report by the Economist magazine argues convincingly for dumping the mushy S(ocial) and G(overnance) concepts and focus instead on environmental sustainability.

The bigger desire for our investments to reflect our values is also strong, and that's for the good. Like giving, investing with values says something about the kind of world we want.

"A sense of what it is that makes life worth living," says Meir Statman, finance professor at Santa Clara University.

Importantly, he didn't say "returns." In a 2020 article for the Journal of Portfolio Management, Statman draws a distinction between ESG "banner waving" investors who want the emotional benefits of ESG investing without sacrificing returns and "plow-minded" investors willing to sacrifice returns for the greater good.

Thanks to banner-waving investors, ESG grew rapidly in recent decades. It's also a major reason why ESG investing has lost its way. Statman says it's time for the movement to return to a plow-minded focus on the greater good. He's spot on.

Farrell is economics contributor to the Star Tribune, Minnesota Public Radio and American Public Media's "Marketplace."