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Investing in a New Kind of ESG

ESG—whatever the acronym stands for—should be continuously defined one company at a time.

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ESG investing is all the rage now, right? But there are no agreed upon practices, let alone a regulatory rulebook, so the concept is pretty amorphous. Apart from citing that it is an acronym for environmental, social and governance, what do we think ESG even means? Does it capture or respond to what I believe are equity investing’s (unrequited) needs at this moment in history? To me, ESG does not. No, I’m not going to formally propose rebranding what the three letters stand for, but for a momentary distraction, if I were to try, I might suggest:

Existentially Sustainable Growth (ESG)

Existentially Safe Growth (ESG)

Existentially Safe Portfolios (ESP)

Existentially Safe Strategies (ESS)

Existentially Stable Strategies (ESS)

Systemic Risk Mitigation (SRM)

Existentially Sustainable Innovation (ESI)…

…or maybe ESG should simply be defined as Existentially Stable Growth investing. Because that’s the endgame we’re aiming for, isn’t it, an economically and environmentally stable world where we can all thrive? And if our goal is to live in an economy where everyone is OK, and we have done all we can to avoid major upheavals including collapse, then ESG is too important to rely (as it usually does) on the application of negative screening criteria to an existing portfolio (such as an index). ESG—whatever the acronym stands for—should be continuously defined one company at a time. Let’s make it both simple and effective: The definition of ESG should break on whether a company is making the world more perilous, or if it is making us all safer.

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Why is it important to make this distinction and not just go with environmental, social and governance, as it is? Well, because it is possible, and common, to take environmental, social and governance criteria, overlay them on top of portfolios holding the causes of our biggest risks, and nevertheless not end up with a portfolio that looks very much like the sustainable Next Economy. All one has to do is survey the holdings of many ESG-branded ETFs and mutual funds to find such holdings as Exxon, TransCanada, Bayer and too many more. Yes, S&P 500 investing is normal, but that legacy “normal” is how we got into this mess. Reversion to that mean is not going to work. The world is in perpetual motion; we must own the things of tomorrow, not the winners of yesterday.

It is possible to not invest in (or even try to correlate with) the economy that raised all of these risks and problems. By seeking to understand what companies actually do before buying them, and by looking hard to find the best examples of innovation and enterprises with a plan to lower our real risks, we can construct the most conservative stock portfolios imaginable in the equity markets as they are today—existentially stable strategies that still provide competitive growth and returns.

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In fact, I would go as far as to argue that today, with our system-threatening risks more clear to us than ever, Existentially Stable Growth is the only reliable path to investment returns. To paraphrase economist Lord Nicholas Stern, attempting economic growth via the companies causing our risks will by definition self-destruct, which means investing in those same companies is a terrible idea. Fortunately, we’re not just stuck with S&P 500 funds, even the ones that may have an ESG label. Today, we have far safer, and therefore smarter, choices. I don’t care what we call it, but let’s invest in ways that bring us all closer to a zero-risk future.

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