This is a tough post to write, and I think it may be unpopular, but I’ve spoken with several clients and investors who struggle with these ideas, so I thought it might be helpful to record some thoughts on these subjects. Unfortunately, I do not write as well as I’d like, so this may be a little clumsy.

 

Investing in what will happen vs what should happen

 

I believe that one of the most challenging items that investors have to deal with is that there may not be any overlap between 1) What they believe should happen, 2) What they think will happen, and 3) How outcomes will actually be perceived. These conflicting views can make investment decisions uncomfortable because an investment that is intended to maximize stakeholder value might not be aligned with what an investor wants or believes should happen.

 

In recent months, there have been countless headlines about social justice, civil unrest, and increasingly politicized views about nearly everything. This, of course, has led to increased ‘volatility’ within society as well as in financial markets. In the near term, an investor’s best course of action may be to invest in securities that benefit from this volatility, despite these securities not necessarily being the ones being most aligned with what the investor wants or believes should happen. People are often critical of capitalism and investing, for the very reason that near term profits may be generated by an investor expressing views that are inconsistent with what they want or believe should happen.

 

Although it sounds simple, investing in what you think will happen, or think will be perceived, is not easy. I’ve found that investors are more comfortable with losses from investing in what they believe should happen, rather than profits from what they think will happen. This is a difficult situation, since losses will not help an investor influence the world towards their ideals.

 

I’d encourage you to consider your biases and preferences as you think about: the US election, Canadian politics, COVID testing, vaccines, technology, gold, crude oil… it’s not a comfortable exercise. The bottom line is investing is not easy, and the path to the best long term outcome can be quite complex.

 

Does ESG = Higher Investment Returns?

 

Another area where I’ve see investors struggling recently is related to ESG (Environmental, Sustainability and Governance) criteria. The media appear to have agreed that higher ESG scores equates to higher long-term investment returns. However, investors should consider if 1) higher ESG scores do in fact result in higher returns, or if 2) better companies have better governance, lower waste, stronger profit margins, and are more thoughtful about all of their stakeholders and, as a result, they generate higher returns and have higher ESG scores. I personally believe it is the latter.

 

High ESG scores may result in higher returns

 

but

 

The best companies are most likely to have high ESG scores and generate higher returns over time

 

This is another argument that supports owning investments, over long periods of time, that are focused on good companies that are getting better.

 

Note: A discussion on ESG, or the circular economy, or sustainable investing, or woke capital … should be accompanied by some quantification of the volume of assets chasing a relatively small group of companies with an ESG ‘halo’ but we’ll save that discussion for another time.

 

These topics are complex, and I’m not as articulate as I’d like to be, but I’m happy to have a discussion, so please reach out.

 

Delli (delli@cibc.com)

 

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