Here’s What Critics of ‘Woke Investing’ Are Missing

Politicians who argue that ESG forces an agenda on companies that has nothing to do with profitability are swapping one set of values for another, says Oxford professor.

Simon Dawson/Bloomberg

Simon Dawson/Bloomberg

Simon Dawson

Allocators that analyze data on climate change when investing aren’t necessarily environmental activists. These investors don’t want to lose money on companies threatened by extreme temperatures or constant wildfires.

For Robert Eccles, a visiting professor at Oxford University’s Said Business School, it comes down to ESG critics not understanding the difference between value- and values-based investment strategies.

In an article titled “The Politics of Values-Based Investing” posted to Harvard Law School’s Forum on Corporate Governance, Eccles argued that while the line between value- and values-based investing strategies is sometimes blurry, critics of the ESG movement who are looking to ban ESG strategies or create anti-ESG funds of their own are trading one values-based system for another.

In late July, Senate Republicans proposed legislation that would effectively ban retirement funds, namely public pension plans, from making investment decisions based on ESG factors. In Florida, Governor Ron DeSantis approved a resolution to ban the Florida State Board of Administration, which manages the assets of the Florida Retirement System Trust Fund and holds over $150 billion in assets under management, from applying ESG considerations to its investment process. Texas, West Virginia and other red states have enacted similar bans.

According to Eccles, an example of a value-based strategy is when an asset manager or allocator invests in companies they believe will thrive because their products help to lessen the effects or ease the global impact of climate change or which don’t face certain environmental risks. These managers invest in specific companies based on their view that climate change is an economic risk and therefore a threat to the value of their portfolio.


“Of course, this assumes a particular perspective on the risks associated with climate change — one can argue that climate change is not real or that, even if it is, regulators will not impose costly changes on companies,” Eccles wrote. “The point, however, for such portfolio managers [is that] climate change is an economic risk, and their incorporation of climate-related data is a value-based investment strategy.”

On the other hand, a values-based strategy is when a portfolio manager invests based on a set of principles that have no connection to economic value. Here, Eccles used the example of the S&P 500 Catholic Values exchange-traded fund, a values-based ETF that is used as a benchmark aligned with Catholic values as determined by the United States Conference of Catholic Bishops.

Values-based investing comes with the risk of underperformance. The CATH ETF includes a disclaimer that spells out the risks of values-based investing, stating that shares in otherwise profitable companies may not be purchased as a part of the fund because these businesses are in sectors or industries that conflict with Catholic principles. As a result, the fund may miss out on profits and underperform similar products that don’t have these limitations.

To be fair, Eccles wrote, the differences between values-based and value-based investing isn’t always clear.

“At the same time, many such funds are explicitly marketed as tools by which investors can invest according to their values. As a result, it may be difficult for investors to determine whether they are foregoing economic value when they invest in an ESG fund,” he added.

The tension between ESG supporters and critics lies in the fact that “values are obviously in the eye of the beholder and what is value investing for one person may be perceived as values-based investing by another,” he wrote.

For example, if asset managers don’t believe climate change is real, then they will see sustainability funds as part of a values-based strategy. But Eccles argued that this is taking it too far: From his perspective, neither a fund that focuses on climate change mitigation nor one that is weighted with oil and gas stocks should be considered parts of a values-based strategy. They are both, in fact, strategic allocation responses to environmental and market conditions, valuing return above all else.

Values-based investing is available on both sides of the political spectrum. For example, in 2017, Point Bridge Capital launched its America First ETF with the ticker symbol MAGA. According to Point Bridge’s website, MAGA is meant to allow investors to put capital into companies that “align with their Republican political beliefs” but the firm doesn’t claim any connection between its investment strategy and economic value.

In contrast, the SDPR SSGA Gender Diversity Index ETF gives investors exposure to companies with impressive gender diversity numbers. Another one that Eccles cited: the U.S. Vegan Climate ETF that avoids exposure to companies that exploit animals or contribute to their suffering. This ETF makes no claims about performance; it’s strictly about vegan values.

Looking ahead, Eccles doesn’t expect the controversy surrounding ESG investing to disappear.

“Conservatives who complain that ESG investing is a way of forcing a social and environmental agenda on companies that has nothing to do with company profitability, perhaps even hurting it, need to look in the mirror if they are creating anti-ESG funds of their own. This is simply swapping out one set of values for another,” he concluded.