By Chris Barton, Editor-in-Chief
There exists on the internet a short opinion piece called “Stocks Weren’t Made for Social Climbing.” It was written by someone named Andy Kessler, a feisty hedge-fund manager who felt the need to issue a decree, establishing once and for all that socially responsible investing is stupid.
I happen to disagree with Andy. But I disagree with people on the internet all the time; if I responded to everyone I disagreed with, I’d probably die. So, most of the time, I just take a deep breath, tell myself that I’ve got to pick my battles, and move on.
But this is one of the battles that I want to pick. There are two reasons for this.
First, this article somehow made it into the Wall Street Journal, which troubles me. As much as I am upset by the article, I’m even more upset that a well-respected paper thought it reasonable to publish anything as self-confidently ignorant and openly derisive as Kessler’s diatribe. If it’s in the Wall street Journal, that means that people at the paper agree with him, and that the paper’s readers (a prodigious bunch) are at least somewhat sympathetic to Kessler’s argument. That makes me very concerned. Though I would normally write Kessler off as simply one more ideologically misguided pundit, The Journal has elevated him to a level where I can confidently feel that by taking him on I am punching up.
The second reason is that one of my professors sent this article to my class, along with a suggestion: “Make sure you go up to Chris Barton after he’s read it and ask him what he thinks….just for kicks :)”
Well, Ramaswamy, this is what I think.
If you haven’t read Kessler’s article, don’t worry; I’ve reproduced it here. His argument deserves to be disputed step by step, as each paragraph holds a new misconception.
Here we go:
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.
Let’s put aside Kessler’s condescending tone and crude dismissal of ‘suckers’ such as Laurence Fink. Instead, let’s appreciate how absurdly close-minded his argument is. There is no right or wrong, he argues – only the accumulation of money. Social good? Morals? Ethics? Any of those things that have vexed the greatest minds of history? Nope, they don’t matter – there are only returns.
Returns are one way to measure value. But to assert that they are the only way to measure value is a willfully ignorant and close-minded claim, a rhetorical trick that attempts to set the scope of the conversation to one narrow conception of value. Kessler supplies no justification for his assertation, and thus we, as discerning readers, should refuse to accept the bounds he has attempted to set on the definition of ‘value.’
“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.”
And for people like Friedman and Kessler to push their view of social responsibility is simply to force others to contribute against their will to social causes favored by Friedman and Kessler. The increase of profits is no less a ‘social cause’ than the preservation of the environment, the alleviation of poverty, or saving the whales – it just happens to be the one that Kessler and Friedman were most inclined to endorse.
Refuting Friedman’s 40-year-old argument is a task for another article, but it’s worth quoting HBR here: “there still isn’t a single shred of empirical evidence that … focus on shareholder value to the exclusion of other societal factors actually produces measurably higher value for shareholders.”
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.
Sure, profits are a decent way to measure a business’s efficiency at delivering value to customers – but not to society, because not everyone is a customer. For example, the profits of companies like Walmart and H&M have been accumulated at the expense of people like the Bangladeshi workers who died in the Rana Plaza factory collapse in 2013. The costs of the human suffering in these sweatshops is not incorporated into the price of the $4 Tshirts at Walmart; the ‘value to the customer’ here is delivered at the expense of the value to society.
There is no free lunch – if the T-shirt seems too cheap, that’s because some costs aren’t included in the price. Externalities abound, which is why ‘free-market prices’ are notoriously bad at uncovering ‘value to society.’ Of course, Kessler once wrote a book literally titled “Eat People,” which casts serious doubt on his concern for non-customers. Or anyone, for that matter.
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.
Amazon sees big returns because that is what it is designed to do; Etsy isn’t. Comparing Amazon to Etsy is like comparing Kessler to Willie Nelson. They have different priorities.
Unlike Amazon, Etsy was never designed to make huge returns. Etsy is one of a handful of companies that explicitly set out to do more than just generate financial returns – in fact, the whole point of being a B-corp is to provide legal cover for pursuing goals other than shareholder value. For example, Etsy had nearly unheard-of maternity and paternity leave for all of it’s employees; this made investors nervous, but Etsy was able to defend its decision to value employee well-being based on it’s B-corp legal standing.
But when Etsy went public, it meant that a company that explicitly valued more than just returns opened itself up to be bought by people whose only interest was returns – the kind of people who see Amazon as the ideal. And when – by design, not by fault – the company failed to invest strictly in increasing shareholder value, the board stepped in and mounted a coup. Etsy is no longer interested in being a B-corp because Etsy is no longer the same company. It’s been taken over by people like Kessler – people who see financial returns as the only possible source of value. Social good and community well-being be damned.
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
In this first sentence, Kessler makes explicit his ignorance, and his avarice. In his world, there are only two possible reasons for someone to do something: it either increases social standing or increases wealth.
But there are plenty of other reasons that people act, many of which are not as narrowly self-centered. The Rockefeller’s reasoning was simple: they divested from fossil fuels – along with 180 other organizations – because they recognized that fossil fuels are implicated in the human suffering caused by climate change, and they didn’t want to be complicit in that. Kessler’s failure to recognize even this simple principle of ‘do no harm’ reveals an astounding immunity to human empathy.
Calpers, on the other hand, seems to get it. A pension fund should invest in businesses, like renewable energy, that contribute to the long-term sustainability of our planet. Retirement savings don’t mean much if the world you retire into is plagued by social unrest and environmental disfunction.
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.
To put this in context, let’s remember that over the last 5 years 82.35% of all large-cap funds underperformed the market as well.
But here Kessler is trying to pull us into the bleak mental landscape that he inhabits, one ignorant of any source of value beyond financial returns. People (such as myself) invest in these funds as a way to ‘invest’ in the future of the planet. The financial returns may be smaller, but there are other ‘returns’ that make up for the difference. Keeping capital away from companies with unsavory practices puts pressure on them to clean up their act. Investing in companies that are trying to do good in the world rewards them for their efforts and enables them to create the societal value that they aspire to. We accept lower returns in exchange for cultivating good corporate citizens.
It’s also pertinent to note that, as Kessler admitted at the beginning of his diatribe, Blackrock – the world’s largest asset manager – can now be counted as one of these “impact” funds.
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 prepublic 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.”
Gore is one of the ‘suckers’ that sees value in things beyond financial return, and he has spent a lot of his career pursuing one source of value – a world with a stable climate – with particular vigor. Like the rest of us impact investors, he wanted to make sure that the money under his charge was put to use in a way that balanced financial returns with ‘climate’ returns. He found that service companies – specifically tech – provided the right balance of financial and climate returns.
Kessler seems to assume that the fact Gore made investments that provided a financial return necessarily means that he compromised his principles of ‘sustainability’. Google can’t be both profitable and sustainable – that would imply that ‘impact investing’ isn’t the oxymoron Kessler believes it to be. Too bad he didn’t do his research: Google’s ‘gobs of electricity’ come from 100% renewable sources. Google is both carbon neutral and economically valuable.
If in Kessler’s eyes being able to balance multiple criteria when making investment decisions makes you “an idiot”, I can only assume he sees his own myopic worldview as proof of his unfathomable genius.
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.
Socially responsible investing is not about charity. It’s not about virtue. It’s not about ‘social climbing.’ It’s about making rational decisions in the face of tradeoffs between multiple sources of value. If Kessler and his community of readers want to feel justified in making self-centered and simplistic decisions, fine. They can spend their time admiring each other’s bank accounts and critiquing George Soros’ art.
But those of us outside Kessler’s recursive intellectual environment understand that the world is complex, and irreducible to simple metrics like ‘returns.’ We understand that ethics matter, that externalities exist, that maternity leave is important and fossil fuels are dangerous. And I am proud that powerful people like Gore and Fink are intelligent enough to look beyond the pages of the Wall Street Journal.
Kessler’s piece is titled “Stocks weren’t made for social climbing.” But stocks weren’t made for much, other than serving as a proxy for company ownership. They weren’t made to capture value to society, or to reward good corporate citizenship. They certainly weren’t made to guide ethical decision-making. Relying on them as the sole indicator of value, as Kessler does, is lazy, ignorant, and dangerous.