THE Covid-19 pandemic brought about profound pain but it had also pushed us to break away from our busy lives, providing us a unique opportunity to reassess our direction and hopefully also, to reconnect ourselves to what matters most to each of us.
This time gave me pause to think about the current trend on combining investment returns while not doing harm, an eminently sensible way of thinking that has finally come of age.
Typical of the wealth management industry, it has filled this need by creating a massive investment sub-sector based around ESG - Environmental, Social, and Governance criteria for selecting investments. But the majority of ESG products have become simplistic and misguided, and little more than a vehicle to charge additional fees, which comes to light as an obvious fact by little more than a cursory look under the hood.
Asking further questions
The common first step is to focus on the "E". Environmental impact is more easily measurable by metrics like carbon emissions, and can be met by simply avoiding fossil fuel investments - that is, not buying shares of oil companies.
Leaving aside the investment returns part of this decision, where shares of oil companies were one of the best-performing sectors over the last 15 months, investors should ask further questions instead of applying simple band-aid decisions like "no oil". Buying shares of ExxonMobil in the secondary market does not benefit Exxon in any way. Subscribing to a new bond or a new share issuance, however, does benefit Exxon. The impact of avoiding Big Oil is that it raises the cost of capital of doing business for oil companies, which at first seems a worthwhile ESG goal.
But what happens when this causes the price of oil, and therefore energy in general, to increase? And what happens when the price rise is exacerbated by the Russia-Ukraine war, increasing 5-fold the cost of energy in Europe, to the point of causing blackouts and stretching household budgets so that they need to cut expenses to survive? And when we add the unintended consequence of the current situation on significantly higher food prices, putting further strain on low-income households, and raising the risk of civil unrest in countries like Egypt, which rely on imports from Ukraine for much of their wheat? The decision to avoid oil investments may have had some positive effect on the "E" part of ESG, but with a massive negative impact to the "S" part that more than offsets the benefits.
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One of the goals that has come about to reduce the impact of climate change is to find ways to take carbon emissions out of the atmosphere and back into the ground. This is an endeavour that requires billions of investments, and the oil companies are the ones that have the technology to achieve this.
Occidental Petroleum has been capturing carbon dioxide for decades. The company is using this technology by participating in the world's first natural gas electricity plant that has zero emissions.
Should investors be increasing these companies' cost of capital so that they cannot devote resources to improve their environment? Or would a better way be to become significant shareholders so that votes can be cast to steer management to increase these ventures that benefit the climate?
Milton Friedman's view that businesses should only act to maximise shareholder value, and that it would be inappropriate to devote resources of the community, workers, or the environment. We can be greedy and maximise our personal interests, and the economy's invisible hand will take care of the rest, maximising everyone's well-being. With wealth increasingly concentrated in the top 1 per cent and average inflation-adjusted wages flatlining for the last 5 decades, we can see that this idealised concept of the economy benefitting all hasn't quite worked out as planned.
In this process we have become completely separated from the true purpose of capital. Instead of having it service us, the roles have reversed where we are continuously attempting to maximise its return at all costs. If we wantto make a real positive impact in deploying investments, we need to go beyond simple cliché investment guidelines like "don't invest in oil".
Fiduciaries like your wealth manager should play a role in this, by incorporating the impact assessment of your portfolio and giving you a breakdown of investments with a rating of their impact value. This should not be a vehicle for charging additional fees, but as a core offering that runs throughout the investment process.
Improving human existence
Going beyond ESG metrics requires a deep evidence-based assessment and measure of the impact that a portfolio's allocation makes. It shifts the focus of a portfolio from purely the economics of growth and market share to add transformation and good change for the benefit of many, not just the owner of the portfolio.
At the most profound level, capital can be re-directed from the traditional purpose of achieving the highest possible return at any cost, to enable us to reduce poverty and suffering, expand our sense of our place in the world not as citizens of our nation, but as citizens of Earth. In our age of fake news, to go beyond unconstrained free speech and instead stand for the promotion of truth. To protect those not able to protect themselves, to improve human existence. And all of this while still making a good return on our capital.
Embarking on this journey to discover your personal purpose of capital is a fascinating exploration of the possibilities that go beyond just the measurement of last year's per cent returns.
When you have more than you need build a longer table, not a higher fence.
The writer is co-founder of AL Wealth Partners, an independent Singapore-based company providing investment and fund-management services to endowments and family offices, and wealth-advisory services.
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