At the Money: Woke Investing vs. Values-Based Investing



At the Money: Woke Investing vs. Values-Based Investing Meir Statman, February 28, 2024

 There’s been criticism of what some call “Woke Investing.” But “Value-based investing” is more politically agnostic than its critics realize. Used by Pro-life investors like the Catholic Church, it aligns capital with deeply held beliefs – be they left or right.

Full transcript below.


About this week’s guest: Meir Statman is Professor of Finance at Santa Clara University. His book “What Investors Really Want” has become a classic that explains what drives investors.

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Transcript: Meir Statman

Barry Ritholtz: There’s been a lot of talk lately about socially responsible investing and ESG, what’s been called woke Wall Street in political circles. But is it really woke to want your investment decisions to reflect your personal values, beliefs, and preferences? We know investors seek expressive benefits from their portfolios. They want their money to reflect their values as well as their financial goals.

I’m Barry Ritholtz, and on today’s edition of At The Money, we are going to discuss values-based investing. To help us unpack this and what it means for your portfolio, let’s bring in Meir Statman. Professor of Finance at Santa Clara University. He’s an award-winning expert on investor behavior and financial decision-making.

His book, What Investors Really Want, has become a classic that explains what drives investors. So, let’s just start with a basic definition. What is values-based investing?

Meir Statman: Well, values-based investment is my preferred name to that movement.  That includes values. in investments. It is called socially responsible investing. It is called ESG. Most prominently, it is called sustainability investing, and, so on. Each of them has some deficiencies because they tilt in a particular direction, liberal or conservative values.

Based investing is a neutral term; people care about their values, and many don’t want to separate them from their investments.

I use the analogy of advising an orthodox Jew, if you are a financial advisor, and you say, listen, pork costs less than kosher beef. It tastes pretty good. How about if you eat pork and donate the savings to your synagogue? Well, everybody understands that that is stupid. My point is that for some investors, having stocks of say a fossil fuel company feels like pork in the mouth of an Orthodox Jew.

And if this is how you feel, then by all means stay away from having fossil fuel stocks in your portfolio or any others that really offends greatly your particular values.

Barry Ritholtz: So let’s talk about some of the nuances that you’re describing between SRI or ESG and values-based investing. As I understand socially responsible investing, it’s centered on using your investment dollars to create quote “Positive social change.”

How does values-based investing differ? It seems to be less focused on changing society and more, just being in sync with your own personal belief system. Is that a fair description?

Meir Statman: Not entirely. So, I think it’s very important to distinguish two parts. One that I call “waving banners” and one that I call “pulling plows”.

Waving banners as being true to your values. That is what socially responsible investing was, but pulling plows is about doing good for others. It’s about changing the world for the better, and they are really very different, and people confuse them all the time. And so, when an orthodox Jew refrains from eating pork, they don’t think that they’re going to affect the pork market much or change other people’s diets. They just want to be true to their own values.

The same applies to somebody who stays away from say companies that employ child labor abroad or engage in poor employee relations or whatever that other thing is. They don’t change the world. They are true to their values.

Barry Ritholtz: Your early research in the 1980s found no change really in performance between the socially responsible funds and the broader market indexes. How does that look today? Is there any impact of ESG or SRI on portfolio performance versus the broader market?

Meir Statman: So there are a ton of studies, literally thousands and some find that ESG-type investments do better than conventional ones; some find that they do worse; some find that they’re about the same. So it is really hard to figure out that there are many things that can get in the way.

Periods, for example, in the late 1990s with the tech boom because ESG portfolios tend to tilt towards growth, ESG portfolios did very well and then they slumped in the slump in the bust of the early 2000s.

My own sense overall is that if you are investing in an ESG portfolio, you are going to lag, what you’re going to have in a conventional low-cost index investing. And the reason for that is really fees and expenses.

Barry Ritholtz: So you’ve described value-based investing as a neutral term that allows investors to base their decisions on any specific value. It could be the doctrine of the Catholic Church, it could be environmental, it could be anything. If that’s the case, why has there been so much pushback to this if people just want their portfolios to reflect their personal values, be them left, right, or center? How come there’s so much, uh, so much pushback to this?

Meir Statman: Well, there’s so much pushback because of the politics because of people’s values. That is, people do not take the approach I take, which says your values are yours and mine are mine, and we should not debate them. Uh, when, when you think about a bad value, like, like protecting the environment, well, if you are liberal, you think that’s good.

If you are conservative, you say “Drill, baby, drill” you know. And so poor BlackRock got itself in deep doo doo because they were promoting ESG which, people, interpreted with, reason as tilting left, and they hated it. And, boy, I’ve heard financial advisors talk about it. And financial advisors tend to be Republicans and conservatives. And they are red in the face when they talk about that.

And in fact, BlackRock decided that they are not going to talk about ESG anymore and move on to do other things. They said, look, you can choose whatever we want. You want, we in fact, we have, we have funds that are entirely in oil and gas.  So if that’s what you want, invest in that. But of course, it didn’t do them much good because of course, conservatives understood that they are tilting towards Democrats and they hated it.

Barry Ritholtz: So I’m glad you brought up financial advisors. For my last question, how should financial advisors deal with client preferences for value-based investing?

Is this the same as other client preferences? Low risk, high income, anything along those lines? Or is this completely different?

Meir Statman: It is, and it is somewhat different. So the last thing financial advisors should do when they have a prospect who says, I’d like to hire you to manage my portfolio. But you should know that I care deeply about the environment and I don’t want fossil fuel stocks in my portfolio.

The worst answer for an advisor is to say, “Listen, I’m here to maximize your returns at the given level of risk. I will do that. And then you use the money I make for you to support the environment.” What a client, what the prospect hears, this advisor does not care about me at all. He has some kind of a solution for everyone. He’s going to shove it down my throat. He doesn’t listen to me.

So don’t do that. That is even if you are a conservative and your prospect is obviously liberal. Put yourself in his shoes rather than asking to put himself in your shoes, and start conversations precisely on what are your values? What matters to you?

I just gave a presentation to a whole bunch of financial advisors.  And a woman asked, she said, “You know, isn’t it true that this easier for women to talk about those squishy things of values of family and so on, then, then men?” And I said, “Well, yes, it is true, but you can train yourself to act in this sense, like a woman, even if you are a man.” I said, “I am shy by nature, but here I stand in front of hundreds of advisors and speaking,” and if I might add a commercial for my forthcoming book, “A Wealth of Well Being” what it does, what a book like that does is help advisors and help their clients, uh, make that jump to speaking about things that are more than risk and return and portfolios. To speak about family, about friends, about community, about health, about religion, and all of those things, that especially men find it difficult to make this jump from, we are talking about the policy of the Fed, blah, blah, to, uh, how’s your family doing?

Barry Ritholtz: Really, really interesting. So to wrap up, Many investors want more than just capital appreciation or income. They want their portfolios to stay true to their values. It’s perfectly fine if you want to do this. Just be aware of the factors that are influencing your decision making, including the costs. Be aware of what all of your goals are when you’re managing your money.

I’m Barry Ritholtz. This is Bloomberg’s At The Money.




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