Published in The Wall Street Journal
Wall Street considers it a truism that money sloshes around the globe seeking the highest return. But there are countless investors, believe it or not, who are willing to accept lower returns. P.T. Barnum supposedly said there’s a sucker born every minute. Many of them go into so-called socially responsible investing. Laurence Fink of BlackRock , which manages $6 trillion in assets, is only the latest to evangelize this fad. But the basic idea is to throw money away. In reality there is no trade-off of Vice vs. Nice. There are only returns.
“Corporate social responsibility” fails under the same halo. Reread Milton Friedman’s 1970 article “The Social Responsibility of Business Is to Increase Its Profits.” For stockholders to push their view of social responsibility, Friedman wrote, is simply to force others “to contribute against their will to ‘social’ causes favored by the activists.”
Profits are the best measure of a business’s value to consumers—and to society. No one holds a gun to the customer’s head. If the buyer weren’t glad to pay the free-market price, he would make the product or perform the service himself. Yet this idea is questioned all the time.
A case in point is Amazon, currently worth $625 billion based on expectations for Amazon-size profits to come. A Seattle Times headline in 2012 lamented that the company was “a virtual no-show in hometown philanthropy.” Sally Jewell of the retailer REI told the newspaper: “I’m not aware of what Amazon does in the community.” Really? Besides offer low prices, huge variety and quick delivery, along with jobs not only in Seattle but around the world, as manufacturers leverage Amazon’s platform to reach global customers? But the company didn’t sponsor concerts in the park! Gimme a break.
A counterexample is Etsy , which for years proudly touted that it was a “B Corp,” one “certified by the nonprofit B Lab to meet rigorous standards of social and environmental performance.” Sounds a bit wishy-washy, but maybe it was supposed to attract social-impact investors. How’s it going? After Etsy went public in 2015, it opened at $31 a share, bottomed out in 2016 around $7, and now trades at $19. That’s worse than dead money, given that the overall market is up a third since Etsy’s IPO. Little surprise, Etsy is no longer interested in being a B Corp.
In 2016 the Rockefeller Family Fund decided to “divest from fossil fuels.” Whether or not that improved the family’s social standing in New York, it couldn’t have been good for the bottom line: Brent crude was $40 a barrel then, and it’s now pushing $70.
California’s $350 billion state pension system, Calpers, has its own set of confusing divestment initiatives. Last month the American Council for Capital Formation warned that Calpers “has demonstrated a troubling pattern of investments in social and political causes that are truly jeopardizing the retirement fund.” Of the system’s nine worst-performing funds, the report says that four focused on renewable energy.
Individual investors can put their own money into hundreds of “sustainable,” “responsible” and “impact” funds, with names like Domini Social Equity and the Neuberger Berman Socially Responsive. Returns are all over the place. But of about 175 that had full-year returns in 2017, 75% underperformed the market. That’s a steep price to pay.
Don’t be fooled by the word “sustainable.” Al Gore and Goldman Sachs alum David Blood set up Generation Investment Management to pair sustainability research with traditional investing rigor. A few leaks of Generation’s returns have shown pretty good numbers. But it depends on what the meaning of “sustainable” is.
Think of Google, which made Al Gore a fortune thanks to his pre-public stock options. Google seems to be sustainable in the business sense, but in the climate-change sense? The company has data centers all over the place that use gobs of electricity. Perhaps Blood and Gore—I know, that would have been a much better company name—are simply deniers, since reports from the Securities and Exchange Commission show that their fund owns not just Google but also electricity hogs Facebook and Amazon.
Master investor Charlie Munger summed it up last year: “Gore hired a staff to find people who didn’t put CO2 in the air, and of course that put him into services. Microsoft , and all these service companies were just ideally located, and this value investor picked the best service companies, so all of a sudden the clients are making hundreds of millions of dollars . . . and he’s an idiot.”
The bottom line is this: Do whatever you want with your money. Feel virtuous. But if you think you’re being charitable for “responsible” investing, you are, but not in the way you think. If you don’t put your money where the returns are, someone else will. By passing up gains, you’re just making guys like George Soros and Steven Cohen richer so they can buy more bad art. Let the money slosh.