Even with the profound pain that COVID caused, it gave us time from our busy day-to-day lives by stopping everything that was, giving us a unique moment to reassess our direction, hopefully to reconnect ourselves with what each of us believes truly matters.

This time gave me pause to think about the current trend on combining investment returns while not doing harm, an eminently sensible way of thinking that has finally come of age. Typical of the wealth management industry, it has filled this need by creating a massive investment sub-sector based around ESG – Environmental, Social, and Governance criteria for selecting investments. But the majority of ESG products have become simplistic and misguided, and little more than a vehicle to charge additional fees, which comes to light as an obvious fact by little more than a cursory look under the hood.

The common first step is to focus on the ‘E’. Environmental impact is more easily measurable by metrics like carbon emissions, and can be met by simply avoiding fossil fuel investments, i.e. not buying shares of oil companies. 

Leaving aside the investment returns part of this decision, where shares of oil companies were one of the best performing sectors over the last 15 months, investors should ask further questions instead of applying simple band aid decisions like ‘no oil’.  Buying shares of Exxon Mobil in the secondary market does not benefit Exxon in any way.  Subscribing to a new bond or a new share issuance however does benefit Exxon. The impact of avoiding big oil is that it raises the cost of capital of doing business for oil companies, which at first seems a worthwhile ESG goal. 

But what happens when this causes the price of oil, and therefore energy in general, to increase? And what happens when the price rise is exacerbated by the Russia-Ukraine war, increasing five-fold the cost of energy in Europe, to the point of causing blackouts and stretching household budgets so that they need to cut expenses to survive? And when we add the unintended consequence of the current situation on significantly higher food prices, putting further strain on low-income households, and raising the risk of civil unrest in countries like Egypt, which rely on imports from Ukraine for much of their wheat? The decision to avoid oil investments may have had some positive effect on the ‘E’ part of ESG, but with a massive negative impact to the ‘S’ part that more than offsets the benefits.

One of the goals that has come about to reduce the impact of climate change is to find ways to take carbon emissions out of the atmosphere and back into the ground.  This is an endeavour that requires billions of investments, and the oil companies are the ones that have the technology to achieve this. Occidental Petroleum has been capturing carbon dioxide for decades. The company is using this technology by participating in the world’s first natural gas electricity plant that has zero emissions.

Should investors be increasing these companies’ cost of capital so that they cannot devote resources to improve their environment? Or would a better way be to become significant shareholders so that votes can be cast to steer management to increase these ventures that benefit the climate?

Milton Friedman’s view that businesses should only act to maximise shareholder value, and that it would be inappropriate to devote resources of the community, workers, or the environment. We can be greedy and maximise our personal interests, and the economy’s invisible hand will take care of the rest, maximising everyone’s well-being.  With wealth increasingly concentrated in the top 1% and average inflation-adjusted wages flatlining for the last five decades, we can see that this idealised concept of the economy benefitting all hasn’t quite worked out as planned.

In this process we have become completely separated from the true purpose of capital. Instead of having it service us, the roles have reversed where we are continuously attempting to maximise its return at all costs. If we want to make a real positive impact in deploying investments, we need to go beyond simple cliché investment guidelines like ‘don’t invest in oil’.