FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
March 8, 2022

Are You An “ESG” Investor? Should You Be? Probably Not

IN THIS ISSUE:

1. The Latest Craze/Fad In Investing

2. ESG Investing & Should You Even Care

3. What Is an ESG Score & What It Means

4. How Useful Are ESG Scores & Ratings?

5. Fed Facing Difficult Policy Decision March 16

Overview – The Latest Craze/Fad In Investing

Let me start today with a simple question. Are you an “ESG” investor? Do you even know what that means? If you don’t, don’t worry about it. I would venture that 9 out of 10 investors don’t know what it means – nor should they. But it’s a growing topic in liberal circles, so I’ll explain it today. Here goes.

ESG stands for Environmental, Social & Governance concerns in your investment choices – or ESG investing. In short, the liberals have decided you should make “politically correct” investments a priority over whether or not they actually make money.

Sound crazy? It is, but at least you should know about it. Even if you don’t agree, I think you might find what follows interesting.

ESG Investing & Should You Even Care

Over the years, there have been many new fads and trends in investment circles. They come and go – mostly go. The latest fad in liberal circles is that you should only invest in companies which practice politically correct values. Never mind if they make money or not.

Liberals have long put their political biases above good investing sense, so you might want to keep reading just so you’re informed about their latest nonsense. Here goes.

It used to be that when deciding whether or not to invest in a company’s shares, you just had to determine if the company is profitable. If the company is profitable, it will likely pay a dependable dividend and the share price might also go up over time. Investing 101, right?

Well increasingly, in liberal circles, it may not be enough for companies to just make profits anymore. An increasing number of investors are incorporating their personal values into their long-term investing strategies through the lens of environmental, social and governance concerns, or ESG investing.

A growing number of publicly traded companies are also adding ESG principles to their corporate frameworks and strategies due to increasing political pressure – regardless of whether that makes good business sense or not. Often, it does not. This is something new that we as investors need to know about, but it’s not always easy to identify.

ESG is a big trend and will continue to be part of a corporate structure moving forward as its relevance continues to grow, for better or worse. As the trend plays out, investors need ways to evaluate how companies perform from an ESG perspective. Some investment firms have stepped into this void and are even providing ESG scores for companies (more on this below).

The Environmental component of an ESG score considers a company's carbon emissions, energy consumption and whether it is working to address climate change. The Social component takes into account the diversity within the company and employee satisfaction. In addition, the Governance part evaluates the company's board of directors’ diversity, executive pay, corporate culture and business ethics, among other things.

ESG scores, the theory goes, allow investors to determine whether a company is taking satisfactory actions to manage the business risks posed by ESG concerns. But the rating should not be used as a stand-alone metric. Here's what you need to know about using ESG scores to help make investment decisions – if you buy into this line of thinking:

• What is an ESG score?
• How are ESG scores calculated?
• What is a good ESG score?
• ESG investment analysis.

Time Out: Remember, I am just the messenger here. Just advising you what is happening out there in the investment advisory world – not promoting it.

What Is An ESG Score & What It Means?

An ESG score is a rating that claims to evaluate how sustainably a company is conducting business. A favorable ESG score could compel investors to invest in a company, either because they see the company's values as aligned with their own, or because investors view the company as sufficiently shielded from future risks associated with issues such as pollution or poor corporate governance. A less-favorable ESG score may turn an investor who is concerned with ESG away from the company.

The ESG score, the liberals tell us, allows investors to gauge the company's intentions on how they treat their employees, how the board makes decisions and/or if they have environmental consciousness as one of their top concerns. A company facing a number of lawsuits over environmental or human resources practices, for example, may have a low score and may be seen as not upholding the integrity of the ESG model.

ESG scores are generally calculated by independent companies that use their own formulas and methods to quantify and measure how well publicly-traded companies are meeting ESG metrics. Assigning an ESG score is said to allow investors to compare a company's performance with industry peers and with companies from other sectors.

Scores among ratings agencies typically range from AAA, the highest, to CCC, but some also use numeric rating scores. Ultimately, the best rating by these agencies would mean the same thing: that a company is able to manage its ESG risks effectively and is a leader among its peers.

Conclusions – How Useful Are ESG Scores & Ratings?

This ultimately comes down to a political question. If it is important that you only invest in companies which operate in ways which you consider politically correct, then ESG scores could be very relevant to you. And with the growing emphasis on having a good ESG score, there are reportedly plenty of publicly-traded companies that fit the bill.

On the other hand, if Environmental, Social and Governance issues are not the primary driver behind how you select your investments, then ESG scores are probably not very relevant to you. I suspect most of our clients at Halbert Wealth Management fall into this category.

When we research money managers to recommend to our clients, we don’t pay undue attention to what they invest in, from a social standpoint. We are more focused on their investment strategy and methodology – and how they’ve performed over time, of course.

That’s not to say we don’t care at all what they invest in. It’s just never been an issue since all the money managers we’ve had an interest in invest in more traditional markets and strategies.

I just thought you might like to know what is increasingly driving liberals’ investment priorities these days. If they want to limit their choices to politically correct money managers and strategies to those with high ESG scores, so be it.

That’s just not our strategy at Halbert Wealth Management.

Fed Facing Difficult Policy Decision March 16

The Fed’s monetary policy committee meets next on March 15-16. Fed Chairman Jerome Powell and other members of the Fed Open Market Committee (FOMC) have made it abundantly clear they plan to raise short-term interest rates at the March meeting and several more times later this year at subsequent meetings (see article below). The thinking has been they want to increase the Fed Funds rate by around 1% by the end of this year.

In all my years of watching the Fed, I’ve never seen them be this clear in what their intentions are. The financial markets have several rate hikes fully priced in. Thus, there shouldn’t be any surprises just ahead.

But there may now be a fly in the ointment, as the old saying goes. The question now is: Does the Russian invasion of Ukraine change the Fed’s plans? There seems to be a general agreement in the financial markets that the Russian invasion of Ukraine will be bad for the US economy. I’m not sure exactly why.

But with this thinking that the Russian aggression will be bad for the US and European economies, there is now the question of whether the Fed needs to raise interest rates as much as we’ve been led to believe to fight inflation. There are even questions if the Fed needs to do anything at all.

While there is always widespread speculation as to what the Fed is going to do, I don’t think Russia’s invasion of Ukraine changes the Fed’s plans much. I still very much expect a 25-basis-point hike (0.25%) in the Fed Funds rate to be announced on March 16, followed by a another 25-bips at the next FOMC meeting on May 3-4 and more at subsequent policy meetings later this year.

Things could change, of course, as they always can. There is widespread speculation that China may follow Russia’s lead and invade Taiwan just ahead, and somehow that might change the Fed’s plans. But for the record, I don’t see China invading Taiwan, and even if they do, I don’t see that changing the Fed’s interest rate plan much.

I could be wrong of course, as always, but that’s how I see it.

All the best,

Gary D. Halbert

SPECIAL ARTICLES

ESG Investing Gaining Traction, Leads To Higher Energy Prices

Vast Majority of Americans Want To Ban Russian Oil (Biden Finally Does)

Fed Could Raise Rates At Every Meeting This Year

Gary's Between the Lines column: Will Car Prices Ever Get Back To Normal?

 

Forecasts & Trends E-Letter is published by Halbert Wealth Management, Inc., a Registered Investment Adviser under the Investment Advisers Act of 1940. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of the named author and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific advice. Readers are urged to check with their financial counselors before making any decisions. This does not constitute an offer of sale of any securities. Halbert Wealth Management, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have their own money in markets or programs mentioned herein. Past results are not necessarily indicative of future results. All investments have a risk of loss. Be sure to read all offering materials and disclosures before making a decision to invest. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.