We believe it’s important to read articles that challenge our thinking. In this recent article by Cliff Asness on the potential costs involved with social investing Cliff asserts that we need to “embrace the suck.” While we agree with Cliff’s assessment in theory (“good company” stocks should underperform bad actors) we aren’t seeing this in practice and the reasons are worthy of attention.
As I shared in my last post, while tobacco companies have historically outperformed – by a fractional measure, we see companies that are engaged corporate citizens perform just as well relative to the stock market as a whole.
So why does the practice diverge from the theory? Cliff’s theory holds true in in an equilibrium environment. However, the current moment is nowhere close to equilibrium on the topic of Sustainable, Responsible, Impact (SRI) investing. A growing number of investors are updating their portfolio investments to incorporate ESG data. The US Sustainable Investment Forum suggests that we are likely at the early stages of a growth curve which is why we don’t see evidence of underperformance in practice.
Not only are we at the early stages of investor perceptions of SRI and ESG investing, we are also at the early stages of quantifying sustainable brand value in the marketplace. We find that marketing analysts (here and here) are far ahead of financial analysts in measuring the financial consequences of social impact and brand reputation and these findings suggest to us that this blind spot will continue for a long time to come.
That said, Cliff’s contribution is ancillary. The first question is how should a person or institution invest their wealth? This question, like all the big questions, begins not with finance but with values, ethics and theology.