I sort of love Just Capital, the nonprofit organization created by Paul Tudor Jones II and Deepak Chopra (!), and championed by Andrew Ross Sorkin and Alessandra Stanley at the New York Times, whose aim is to rank public companies on their “justness” (!), and which is now teaming up with Goldman Sachs Group Inc. (!) to create an exchange-traded fund (!) of the justness-est Russell 1000 companies. Back in the good old days, before “Dennis Rodman arrives in Singapore for the Trump-Kim summit in a T-shirt promoting a cannabis cryptocurrency” was a real thing that happened, that was the sort of incongruous assortment of words that I could really enjoy. Also I have said it like 100 times now and the word “justness” still just makes me laugh.
Goldman Sachs: If you care about justness, you should invest in our new financial product.
You: You mean, if I care about justice?
Goldman Sachs: I never said that, you said that.
Anyway Sorkin has a column about the new ETF, and how it “would have outperformed the Russell 1000 by 3.47 percent over the past two years” in a backtest. You might consider Cliff Asness’s argument that for socially responsible investing to , it must have expected returns than socially irresponsible investing, but that is a bit of a downer so maybe ignore it for now.
What I like about Just Capital, besides its terminology, is its methodology. Socially responsible investing—particularly, socially responsible investing—is hard because it is difficult to know what to care about, and how much. If you run an investment portfolio whose objective is to maximize returns, then you know what you are looking for (stocks that will go up), and you know how to measure your performance (did the stocks go up). If you run an investment portfolio whose objective is to maximize returns social welfare, then, first of all, how do you manage the tradeoff between those goals? But even harder: How do you manage the tradeoffs among social-responsibility goals? How do you pick what those goals are, and rank which are most important, and quantify how much of one is worth how much of another? If a company is generous with its workers and honorable with its customers, but pollutes a lot, is that better or worse than an environmentally pristine company that uses unpaid interns?
The approach you see a lot in socially-responsible investing is to assume away the problem. “Whether social impact investing will turn out to be the most profitable way to invest has become one of the biggest questions within the investment world,” writes Sorkin, and of course if the answer is yes then you don’t have to worry about the tradeoff between profits and social responsibility. (Asness’s side of this debate—that it’s not a question at all, and that the of social impact investing is to be less profitable—seems a lot more compelling to me.)
The subtler form of this argument is that these issues go to the long-term sustainability of a company, and that a company that is environmentally rapacious or mistreats its workers will underperform in the long run, even if it does well today. This argument suggests a way to rank and optimize social-responsibility criteria: Whatever is most important to the long-run success of the company should get more weight. (If mistreating workers will depress morale a little without causing a crisis, while polluting will ultimately lead to massive liability and bankruptcy, then you should care more about the pollution, etc.) But if you really believe all of this then you are sort of back where you started from. That’s a ranking. Stock prices, after all, are supposed to discount the expected future cash flows of a company, in perpetuity. If those expected cash flows will be lower in the far future because the company pollutes too much or whatever, then that should be reflected in the stock price. Your measure of success in socially-responsible investing is just, did the stock price go up and stay up for a long time. You are making active bets about what characteristics are most likely to maximize the stock price. You’ve gone back and subordinated everything to maximizing stock price, but in a more roundabout way.
Alternatively you could figure out what you care about and optimize for that, whether or not it maximizes the stock price in the long run. This is fine if you are a person, but harder if you are an asset manager or index provider who wants to market a product. “Why should I invest in a fund that buys stocks based on the social issues the fund manager cares about personally,” a customer could reasonably ask.
Just Capital takes another approach that I find pleasingly bizarre and random: It does an annual survey. From its methodology page:
The 2017 Survey Results defined seven major sets of issues that capture corporate justness, which in our ranking model we call Drivers. Each Driver comprises multiple specific criteria, which we call Components. These determine what we actually measure in the model, and there are 39 Components in total. Through extensive quantitative polling, we then derive weights for the Drivers and Components, which correspond to their relative importance in the public’s opinion. We make sure the opinions we gather are as representative as possible of all Americans.
To produce the company rankings, we then collect and evaluate data from a myriad of different sources on how each company actually performs across the various Components.
I mean. I don’t know why any individual person would want to invest in a way that maximizes the weighted social preferences of a broad survey of Americans, and that changes each year as those preferences change. You should invest in a way that maximizes your preferences, not the average preference. On the other hand, I can understand why an asset manager offering a product would want to maximize the average preference. That's where the money is! (Really you should weight the preferences by net worth rather than trying to be “as representative as possible of all Americans,” but whatever.) Mostly though I just like it because it an approach, a way of ranking and deciding between social criteria that—well, that isn’t , exactly, but that pushes the subjectivity back onto someone else.
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