The topic of environmental, social, and governance (ESG) investing is a polarizing one. For every individual who advocates for it, there is another who rails against it. John O’Connell, the CEO of Oasis Group and author of the book “Rise of the Activist Investors”, falls into the first group. He believes that people who get involved in shareholder activism and continue to have discussions around it can create positive change. He joins the ETF Think Tank to discuss this and where the ESG space might head in the future.
The term “activist investor” can stir up some negative stereotypes. In reality, O’Connell thinks this can be very positive and details in his book the arc someone can take from the very early stages to professional activist. Groups he calls “passive investors” and “casual activists” show interest and may start investing in broader ESG funds. “Beginner activists” start to narrow their investment portfolio to more accurately reflect their personal views. When you get up to an “influencer activist” and “professional activist”, you start trying to bring others into their circles to actually effect changes in companies through proxy votes.
What is driving some of this change is that young and socially conscious investors are using the power of their voices. Events, including Occupy Wall Street and the Me Too movement, have enhanced the visibility around vocalizing personal values. Once you add in the growth of ultra-low-cost investing through platforms, such as Robinhood, you can much more easily merge the two. Value-matched investing has become much easier and much cheaper to do. Even several years ago, it would have been difficult to see this development in the investing space.
O’Connell believes that part of the reason why ESG is controversial is because there are so many definitions. The criticism comes with looking at individual holdings within funds and finding anomalies. There is a lack of consistency around the data and definitions and that always has investors asking “why is this company in or out”. Another problem is that there are well over 100 different ESG factors, but it ends up getting boiled down to just three letters - ESG. This tends to oversimplify a very complex issue. Analytics firms are trying to develop more robust and consistent measures and data sets, but some investors will keep looking at portfolios and claim they are bogus or there’s greenwashing. The fact that people are talking about this emotionally is great because that’s how you’ll see change.
There’s some disagreement on whether direct indexing or an ETF is the better means of ESG investing. A casual activist may find an ESG fund “close enough” over time. As you move up the chain, you may want a direct index or more specific product. The counterargument is that direct indexing does not work as well because it needs the group. You can still have the client discussion, be an activist through an ETF and have a group to support it.
Other key takeaways:
- O’Connell says that ESG investing without activism is pointless. Even just talking about it helps to advance the cause. The ability to connect with others that have similar views is what’s going to drive change.
- Connecting with like-minded people can be great, but it can also be a minefield. It can be potentially dangerous if you swing too far in one direction or another, but if we find enough people who truly do care, O’Connell thinks we’ll be in a better space.
- Corporate raiders, who manage to control enough shares to break up a company whether they liked it or not, have had a detrimental effect. Breaking up an underperforming company may or may not be a bad thing but imposing your will on a large enterprise could end up being counterproductive.
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