Market News: 2/03/2020Submitted by Executive Wealth Management on February 4th, 2020
According to the Roman historian Suetonius, the 1st century Emperor Vespasian instituted several unpopular and novel taxes on the public during his reign in an attempt to replenish the depleted imperial coffers. None were more ridiculed than the “Urine Tax”, a new levy on the collection of liquid waste from the public toilets of the city. When confronted by his son Titus about this grubby enterprise, Vespasian waved some gold coins in front of his son and asked if they smelled, when Titus said they did not, the emperor replied that this was because, “Pecunia non olet” — Money doesn’t stink. This saying has come down through the ages as the slogan for the idea that the value of money is not besmirched by the means with which it was obtained.
Increasingly, the modern financial markets are dissenting from the old emperor’s viewpoint on tainted earnings, with a growing number of people investing in socially responsible or ESG (Environmental, Social, or Governance) funds. These funds promote themselves as investing in companies that pursue strategies that address global environmental, social, or corporate governance challenges, such as reducing fossil fuel emissions. According to data from Morningstar, the money flowing into these funds more than tripled in 2019. With newfound popularity, lofty ideals, and claims from some that their returns will beat the broader market, ESG funds have come under extra scrutiny from the Securities and Exchange Commission. At the end of last year, the SEC sent official letters to several firms behind these funds, asking for clarification on the models and criteria used to pick the companies they invest in.
What makes a business socially responsible can lead to very intense disagreements amongst investors, but even when a group of people agree on the general principle, it can still be difficult to implement this principle in an actual portfolio allocation. How well can social responsibility and goodness be codified?
The Wall Street Journal noted recently that J.P. Morgan’s ESG Emerging Bond Index (ticker: JESG EMBI) gave a higher weighting to the fixed income investments of the repressive Saudi Arabian regime than the standard benchmark index. The complicated algorithms and metrics that the investment bank applied to their index seemed to produce counterintuitive results. With the current nebulous state of ESG investing, we will leave any investor interested in these new securities with maybe the wisest of all Latin sayings: