How should we invest our money, Does it make sense to invest like a Saint or like a Sinner? ESG (or environmental, social and governance) investing is one of the hottest things in markets right now, with large fund managers competing to be seen to take ESG more seriously than the next. Setting aside any moral judgements, the commercial rationale for the investment management industry is pretty clear: ESG funds have attracted about $350bn over the last two years, almost twice as much as the rest of the stock fund universe combined.
Hottest things in markets right now, with large fund managers competing to be seen to take esg more seriously than the next. setting aside any moral judgements, the commercial rationale for over the last two years, almost twice as much as the rest of the stock fund universe combined. in the first six months of 2021, more
Esg-related bonds were issued than in the full year of 2020. it appears to be growing quickly. more than 17 percent of bonds issued last month were labelled saudi arabia’s public investment fund has even gotten in on the esg trend having announced that of green bonds. i’m sure you can do green investments in
Saudi arabia, and lots of investors would be delighted to get involved in this. i’m not entirely sure how esg scores unelected leader who occasionally kidnaps his critics abroad, tortures and dismembers them, will lose a few esg points. but at least they are showing a commitment to the energy transition. the opposite
Of esg investing is investing in sin stocks (or vice investing) – a term for investing in companies that engage in a business or industry that’s considered unethical, immoral, or unsavory. companies in the weapons, alcohol, gambling, socially responsible investing and ethical other companies and industries that
People environmentalists for example might classify companies in that space are polluters. vegans might consider any company that raises animals or sells animal products to be a sin stock. some might even call alphabet (the parent company of youtube) a sin stock as people binge-watching youtube videos are
Indulging in sloth. that’s crazy talk though, don’t listen to those people, different societies at different points in time disagree as to what is considered acceptable behavior. a good example is the way the western and eastern cultures view debt. in the western business practice and is even rewarded with
Government tax incentives. but for thousands of years in eastern cultures, borrowing money, which implies the inability to live within one’s means, is viewed as “losing face.” in muslim countries, interest. so, muslim investors can only receive (millennials) are leading the charge into esg or socially responsible
Investing, but in fact over the last five years boomers have moved from having less than half of a percent of their assets in ethical funds to over 5%. millennials have around 4% of their assets in ethical funds, which has the carbon footprint of sasquatch. around how these different styles of investing might work out
In the long run. does ethical investing improve the world, and should an ethical investor expect to outperform a vice investor? how esg investing might improve the world, but they can’t both be right. the first theory is that investing in positive (or “good”) companies will improve the world by raising the cost
Of capital for bad companies, the idea is that seeing this higher cost of capital will encourage unethical businesses to shift to a more ethical, this is an appealing theory because it makes some rough sense as a matter of economics. it has problems though. for one thing, you have to have an awful lot of
Money invested this way to meaningfully increase the cost of capital for sin stocks. even huge asset managers like blackrock or fidelity can’t actually point to unethical companies that they put out of business just by refusing to buy their stock or buy their bonds. raising the cost of capital of sin stocks
Means increasing the expected returns of these securities for those who choose to invest in them. the logic of raising sin stocks cost of capital, implies that an ethical investor in the long run will get lower returns than a sin stock investor, because ethical investors are going to push up the can be seen in the bond market
Where green as you can imagine the marketing teams at esg funds are not pushing the idea that they improve the world by giving you a lower return on your investments. it is just not a great sales pitch. and increased regulation of business practices. the pitch is that if you are at the front of this trend, you’ll get
Better returns than those who are stuck in the past investing in guns, tobacco and extractive industries that will be obsolete when regulations and societal norms change. that tells the client a good story — “you can be ethical and get rich from it too” — but, the investment strategy improves the world. it
Profits when governments move faster than expected to regulate certain industries, but the investments themselves do nothing to bring about these changes. this argument is not that you are improving the world by your style of investment, it is instead saying that the world is changing on its own and you are investing in
The future well, frank fabozzi from nyu studied the twenty one countries around the world. he found that over the period sin stocks generated excess another study by hong and kacperczyk, found that less “norm-constrained” investors such there are many possible causes for this performance difference. sin
Stocks might be systematically cheaper than their fundamentals would suggest, just because certain types of additionally be facing less competition as new competitors would struggle to raise capital in today’s environment. that protection allows sin stocks are exposed to risks like regulatory
Tax risks, where governments often increase taxes on things like tobacco or alcohol in order to reduce demand for them while raising revenue. there are often other legal risks like the risk that a company that makes a dangerous product could be sued by a customer who was injured. the higher returns investors make on
These investments might just be compensation for taking these risks. investing to vice stock investing you can compare the returns of a mutual fund called the vice fund to the returns of your favorite esg fund. the vice fund has been around since 2002, and according to their prospectus, they make best-in-class
Equity investments within the global tobacco, alcoholic beverages, gaming, and aerospace/defense industries. they have higher than average fees, but have mostly outperformed the stock market on a risk adjusted basis since inception. the vice fund has not done as well recently, as investments in aerospace and casinos
(For example) were ill suited to the covid19 pandemic. most esg funds or indices that i have looked at are heavily weighted in technology stocks, and exclude energy stocks. let me know your thoughts in the comments section as to which investing style you prefer. into esg portfolios. are companies like facebook,
Apple and amazon more ethical oh, one last thing, if you enjoy this content, but want to listen on the go, you can find it as an audio only podcast on apple podcasts, patrick boyle on finance. see you later, bye.
Transcribed from video
Saint or Sinner By Patrick BoyleliveBroadcastDetails{isLiveNowfalsestartTimestamp2021-08-10T141520+0000endTimestamp2021-08-10T142738+0000}