The Humanity Dilemma for Family Offices and ESG

First, let’s cover the basics.

The topic of ESG is one fraught with controversy. On one hand, proponents of ESG (Environmental Social Governance) Investing (1) state that the ESG convention allows investors to judge a company’s behavior via a set of standards. Therefore (as the argument goes) the investor can ‘rest happy’ knowing he is invested with a ‘socially conscious’ corporation, working for the good of the world. Or … avoid those companies that they feel are acting irresponsibly.

Opponents however, have a series of questions. Who and what … exactly … are defining what those ‘ethical’ standards should be? Shouldn’t the individual investor or fund manager do their own due diligence to investigate the behaviour of any corporation; and make their own judgments? Doesn’t a ‘codified set of standards’ in fact, constitute a belief system? Shouldn’t such matters should rest in the hands of family, community and religious institutions? Is it not inherently dangerous to allow a corporation to codify a standard that the corporation believes is ‘moral and ethical’; as this could lead to even greater corporatism and Fascism (The definition of Fascism being the coordinated cooperation between Corporations and Governments, codified into law for the supression of other beliefs)? But more than this, if ESG standards are enforced or imposed onto others … then in fact, another entities moral system is being imposed by institutions. A scenario, they say, is little different than Religious Conquistitors forcing conversion to a belief system and baptism into that belief; onto an Aboriginal people at the threat of a sword.

Proponents of ESG would offer the rebuttal, that such enforcement was not present with ESG investing. There was no ‘supression’ of other beliefs. One’s were free to invest as they will.

That, however, no longer seems to be the case.

The opponents of ESG believe that they have now demonstrated that the problem of leveraged institutional influence of this codified belief system. As noted by opinion pieces by fund managers in The Wall Street Journal (2) and others (3), in the case of physically replicating ETF’s (as opposed to Synthetic ETF’s), the ESG belief system of large financial companies such as Blackrock can unfairly leverage ESG’s ideology via voting rights. And do so onto those that do not even invest in such companies, via the ETF mechanism. ETF’s, which were not created to leverage such influence.

In other words, when an institution such as State Street or BlackRock builds a physically representative ETF, one must understand that the ETF as an asset, is a derivative. Or, it is an instrument that is based upon something else. And to physically represent, say, a “Retail ETF”, it buys actual shares in the such retail companies. Shares? Come with voting rights. The default is for Blackrock to vote for the shareholders to ESG ideals of the physical shares that it owns. Since ETF’s are new-ER entities (I have been trading for close to 30 years, and from my viewpoint as an ‘old guy’ they are still ‘new’, or perhaps … new-er instruments) this means that now … even MORE voting rights have been given and leveraged in the hands of a large institutions by the proxy of a recent financial instrument. And those voting rights are being used to enforce (even against the corporations wishes if their majority interest is not enough to conteract the vote) an ESG belief system. I.e., ‘Joe Six-Pack’ is wondering why Bud Light seems to have temporarily “lost it’s mind” to the “woke agenda” at the expense of profits? (4) Well, ESG Investing, they claim, is behind much of this paradigm. A consumer who does not even invest, is being forced to accept a Corporate belief system that may not be their own.

All of the above, is also providing a dilemma to Single Family Office Structures.

Of course, the legal manner in which the corporate structure that a Family Office operates is dictated by the legal documents of Corporations, LLC’s, Trusts, Corporate Charters, Operating Agreements and Amendments that make up the Companies of the SFO. But in addition to these legal documents, many Single Family Offices are governed by a humanist or humanity (as opposed to legalistic) charter, or constitution. A Family Charter can serve as a sort of mission statement, involving a record of a families values, principals, and ethical beliefs. At times, a Family will clearly state in such a Charter, the religious belief system and principles they would wish for their family to uphold, and how these principles should affect matters such as material purchases, communication within the family toward a common goal … and yes, how those beliefs should influence how the family invests the capital of those Companies that the Family controls.

So what happens when the principles of ESG, conflict with the above? What happens if a Single Family Office has established large investable positions that through dividends, pay the Family a Regular Income, and that position has been established via a portfolio mandate that the Family states that it will follow, and has codified that it will follow?

We have a dilemma between, perhaps even the religious principles of a Family, a Single Family Office, it’s codified structure, and investing with a company; to the codified belief system of ESG.

To illustrate: A Single Family Office may have wanted to invest with a Grocery Store that pays a dividend, believing this would be a company that is completely neutral to their own religious belief systems. Therefore, there could be no conflict with their religious beliefs, and that any Grocery Store with any sense would seek profitability, thus securing their dividend. As well, having a “Grocery Store” stock paying a dividend, fits within the portfolio mandate of the SFO.

However, it has been noted that ESG Companies are willing to sacrifice profitability and at times … must sacrifice profitability … in order to reach such lofty standards, as ESG standards distort decision making (5). And worse yet, not only are profits being sacrificed (which anyone watching the Bud Light debacle should see quite clearly), the rise in removing transgenderism from a list of mental disorders (6), comes into conflict with many religious ideals that can be found in Zoroastrianism, Judaism, Christianity and Islam. Now, this Family Office discover that simple Grocery companies, in order to reach their ESG goals, are firing religiously minded individuals who objected to those ideals (7).

What is a Single Family Office to do? They may be now invested with a Company that is in direct conflict with their stated Family Charter. And their portfolio mandate may dictate they be invested, for reasons of diversification or non-correlation of assets, to be invested with a dividend paying Grocery store.

Again, the refrain by the proponents of ESG would be to offer the same rebuttal. One’s are free to invest as they will, and they can invest with another Grocery store with which they feel more comfortable.

However, as physical ETF Institutions who are enforcing ESG ideals by owning more shares, and thus more voting rights in companies? Blackrock, State Street and others are defacto removing companies from consideration, and thus restricting the investable list of assets; for purely ideological reasons being imposed on Companies.

And the SFO is left to try to find a replacement company, that pays a regular dividend for Fixed Income for the family, while at the same time adhering to other Portfolio Mandates that have already been codified.

Going through such a process? Is no small task.

There are alternatives. Strive Asset Management, LLC (8) has arisen to provide ETF’s that specifically excludes ESG companies, and any sort of Activist approach to the physical representation of those shares represent.

Which, while attractive to those who oppose the ESG movement for political, ethical, scientific or religious reasons? It seems to me this only furthers the polarity, divisiveness and tribalism that has been increasingly evident in the world in recent decades. Those who are ‘for’ or ‘against’ a particular movement.

Time will tell how the ESG movement fares against such competition and issues.

1. ESG (Environmental Social and Governance) Investing: https://www.investopedia.com/terms/e/environmental-social-and-governance-esg-criteria.asp
2. The Wall Street Journal: BlackRock: Passive Investor, Activist Shareholder: https://www.wsj.com/articles/blackrock-passive-investor-activist-shareholder-fink-climate-11644451963
3. ETF voting rights: how do they influence companies?: https://www.justetf.com/en/news/etf/etf-voting-rights-how-do-they-influence-companies.html
4. Bud Light Sales Fall 26% as Transgender Backlash Worsens: https://www.msn.com/en-us/money/companies/bud-light-sales-fall-26-as-transgender-backlash-worsens/ar-AA1aBjNn
5. The Harvard Business Review: An Inconvenient Truth About ESG Investing: https://hbr.org/2022/03/an-inconvenient-truth-about-esg-investing
6. American Psychiatric Association: Gender Dysphoria Diagnosis: History: https://www.psychiatry.org/psychiatrists/diversity/education/transgender-and-gender-nonconforming-patients/gender-dysphoria-diagnosis
7. NBC News: Kroger sued for allegedly firing workers who refused to wear rainbow symbol: https://www.nbcnews.com/feature/nbc-out/kroger-sued-allegedly-firing-workers-who-refused-wear-rainbow-symbol-n1240252
8. Strive Asset Management: https://strivefunds.com/