Environmental, social and governance investing

Is it another new fad?

Environmental, social and governance investing

Business and investing fads come and go, much like other aspects of life. Those with merit last longer than others, while many fall into the trash bin of overhyped and bad ideas.

Two decades ago, Six Sigma became a highly touted business concept, designed to reduce defect rates to less than 0.0003 per cent. I was in the corporate world and our company went gaga for Six Sigma. Intense “black belt” training qualified Six Sigma team members intent on improving processes throughout the company.

Those of us managing the business were discouraged from making improvements without the process being studied and then sanctioned by a Six Sigma team. In other words, common sense changes that everyone operating a business needs to make daily now required Six Sigma team approval, miring the business in another level of bureaucracy. Not great for a fast-paced competitive environment.

Many companies adopted Six Sigma. It was still the days that annual reports were mailed to investors and I usually took the time to read the shareholder letter. Company after company touted how their new Six Sigma initiatives would improve profitability. It became yet another in a long list of well-intentioned, faddish initiatives that failed with overzealous or inappropriate implementation.

The investing world also comes replete with its fads, fancies and buzzwords. BRICS for Brazil, Russia, India, China and South Africa, was a common acronym 15 years ago when the world went crazy for investments related to these five emerging countries. All but the Indian market have failed to eclipse their 2008 peaks, with Brazil still off about 70 per cent. Popularity drives up prices, reducing future returns. When fads get really carried away, they become speculations like the dot-com bubble.

There is centuries long history of such bubbles including Tulipomania, when the normally staid Dutch citizenry sold their houses to buy bulbs.

Then there’s buzzword bingo! Terms like “multi-factor investing” sound smart, but shouldn’t one always consider numerous factors when making an investment? The investment industry perpetually manufactures and sells products with fancy names, but if you don’t understand it, don’t buy it. The main purpose is to generate fees. I love the simplicity of common stocks.

One of the newest crazes is environmental, social and governance (ESG) investing. It has actually been around for half a century, with its genesis being the repudiation of companies associated with South Africa’s apartheid policies. It’s hard to argue against the importance of environmental stewardship, corporate social responsibility and good governance.

Unfortunately, the term has become synonymous with the anti-oil movement and green energy investment. ESG mutual funds and exchange-traded funds are proliferating, but whether they live their mandates is another story. Buyer beware. Companies are also touting their ESG credentials, not unlike Six Sigma of yesteryear.

Numerous organizations, such as university endowment funds, have jettisoned oil and gas from their portfolios under the auspices of ESG. However, my suspicion is they were selling oil because of its dismal underperformance for a decade. As oil recovers, I suspect many will find a way to re-include energy assets.

Norway’s sovereign wealth fund, the largest in the world, announced two years ago it was divesting oil and gas. It recently announced it would hold its remaining energy assets to influence them towards better sustainability from an ownership position. Was that coincidental with recovering oil prices?

Rather than rail about the current ESG hype, let me suggest two sources to help identify honourable corporate citizens. The Ethisphere Institute has published an annual list of the “World’s Most Ethical Companies” since 2007. Fortune magazine’s annual list of “The World’s Most Admired Companies” is a decade older. There is nothing new about aligning profits with purpose, generally leading to better corporate performance.

I try my best to be an anti-fad investor. That’s where the bargains are. Some of the best current values appear to be in oil and gas and the much-vilified pipeline sector. I see nothing whatsoever unethical in the production and efficient distribution of products critical to modern society, while doing my best to use those resources judiciously.

Using a little old farmer vernacular, investing requires some skill in “separating the wheat from the chaff.”

About the author


During a 35+ year career in ag sales and management, Herman VanGenderen became an active investor and stock and real estate, building portfolios in both. His latest book is “Stocks for Fun and Profit: Adventures of an Amateur Investor.” Visit his website at www.you1stenterprises.com or email Herman at [email protected]

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