Why the Fuss About ESG?

Does Vanguard control the world?

Investors exercise control at public firms via proxy votes and board seats, as well as the threat of divestment. This control affects different companies in various ways, depending on how much of the stock investors versus insiders own, how the company is structured, and frankly, the personalities of the company leaders.

If you get on the company’s board, you are one of the bosses of the bosses. That can mean a lot or a little, again, depending on the company. You need votes to get on the board. One vote per share. So, if you own 33% of the common voting shares, you have a huge voice. Realistically, given how large a lot of public firms are, it’s remarkable to own even 3% of the outstanding shares.

You can look up how much of what companies an investor holds if they file a 13F, which large investment firms do. Here’s Vanguard’s. It’s a bit of an eye chart – grab your reading glasses. Its largest holding is Apple, of which it holds 2.96% of outstanding shares. If Vanguard talks, does Apple listen?

If all the big investment shops sold all their shares of Apple at once, it would (presumably) tank the stock for a while, and that would make it more difficult for Apple to raise more money from stock issuance.¹ It also makes it theoretically less attractive to work at Apple, to the degree one is compensated in equity. It’s also annoying to have to answer a bunch of questions about why your stock tanked while you’re trying to run a business. The threat of mass divestment may well get a firm’s attention.

The threat would have to be credible, though. Given how huge and successful Apple is, how large a share of the U.S. stock market it represents, and the amount of invested assets in indexed funds which are presumably not threatening divestment (about half, according to the aforementioned factbook), if Vanguard CEO Tim Buckley called Apple’s Tim Cook and said “Dammit man! Hire more women or we’re out!” I suspect Buckley would get a politely worded email from investor relations, at most.

What happens if ESG becomes verboten?

I have bad news for people looking to redefine their investment conversations around ESG. It’s a terrible idea. Investing, and indeed democracy, needs more free thought and open discussion, not less, to be successful. But more to the point of the offended oil executives, governors, and legislators, I don’t need to say “environment,” “social,” “diversity,” or even “sustainable,” to ask the same questions:

• Will this business be profitable in 10 years? Twenty?
• Are consumer tastes for this product or service growing or shrinking?
• What are the negative headline risks to this company or industry, and how will that affect my investment?
• Is this company managed for long-term success or short-term stock movements?
• Is there an unquestioned “great leader” at the helm, or are enough brains involved and heard to avoid errors caused by a narrow perspective?
• How expensive is it for this company to operate within the confines of laws and regulations for their industry?

Why the fuss?

I don’t pretend to know whether there are a bunch of tree huggers trying to take over the world from large investment firms. I have visited many firms, including Vanguard, BlackRock, and Fidelity, and I didn’t get the impression that I was at peace rally. But that doesn’t qualify me to speak on behalf of their leaders. I’m getting weary of noises akin to “they are trying to impose a ‘woke’ agenda on our state/bank/retirement fund.” Maybe someone is, I don’t know. It’s not me – sounds exhausting.

It’s just a sensible investment strategy to focus on long-term profitability, risk-mitigating business practices, and market demand. To the degree that investors impose restrictions on their investments – be they “woke,” religious, or “I hate Elon Musk” (yes I saw a client impose that restriction once), it’s their money and they can invest it how they want. Investment companies are smart to try to meet that demand.

Suzanne Highet, CFA, CFP®, is a financial advisor at Core Planning and independent investment consultant. She is based in Portland, Oregon, and serves individual clients and RIAs around the country.

¹ At the end of 2022, Apple reported $48 billion in cash and short-term investments on hand and $119 billion in earnings before interest and taxes, from a gross revenue of $394 billion. They don’t appear to need a lot of money from stock issuance at the moment.

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