Everything is inflated these days, food, energy, technology, pharmaceuticals and best not to forget, egos and other desperate drives for mental pleasure. I bring this up, because in my study of behavioral finance over the past two decades the focus has been less on popular culture as an industry, but a conduit for industries that feed it to monetize. A good example is the pandemic driven focus of the financial industry, and others, to embrace a future where investment will focus on ESG (Environmental, Social, and Governance) analysis. However, the one drawback to this approach, in my opinion, is that the analysis of ESG is non-financial, and hence a lot of stocks and especially ETF’s have both soared and bared the brunt of that fact.
I don’t want to suggest that ESG isn’t important. For many years the investment industry has rewarded companies that had CEOs, hired for the sole purpose of breaking up a company, selling its remaining parts while also announcing significant layoffs. Albert Dunlap was the most revered, even happily referred to as “Chainsaw Al” because of his particularly misguided passions. And speaking of layoffs, there was a time when, in general, a company with market challenges would see their stock rewarded when 15% of the workforce was laid off, solely to improve the balance sheet. Now fast forward to last year’s pandemic when companies within the Fortune 500 had to layoff millions of employees in the face of a crashing economy, many smaller businesses serving the quarantined consumer had only a little time before closing was the only option. The changes and responses on the back of something other than profit taught the business community that employees are more than just a number on a balance sheet, and the communities are more than just a piece of land to build office space. In short, as the technology industry saved the day with massive hirings, the healthcare industries and their employees moved with unparalleled speed to find a vaccine, even the government came through with a package aimed at stimulating the economy by sending money to the unemployed and struggling businesses. And although the government could easily be accused of seeing people as nothing more than numbers, or votes, the impact on the investing community has been a huge influence on investing patterns that exist through today. Last Friday was the big day in the labor markets and the follow through in the capital markets further serves as a welcome reminder that the reopening of the economy is inevitable, variant or not.
So, the new platform for analysis, which has been mine for some time, is including the governance of the company’s management and social values of the companies’ responsibilities and products. Unfortunately, much has to be done to guide our focus on what the political and social media influence is on what constitutes adequate governance. Something other than the usual, such as what products are accepted in typical fashion of appeasing the few at the expense of the many. And most of all recognizing genuine corporate actions of setting targets for reductions in carbon emissions, investing resources to develop new products, and choosing suppliers that are better prepared for the transition to a low (not zero)-carbon economy, over those companies and social institutions that are simply pandering to the narrative. The challenge theses days is not to cease analyzing both, but to take the lead away from the Algochums that can exploit volatility for only so long until professionals realize it’s shortcoming on genuine fundamentals, genuine ESG ambitions, and what the presence of genuine skepticism can bring to finding a good investment with a great future.