ESG is Not Enough: Why Intention Matters

In January, during the market frenzy which saw GameStop Corporation stock go from approximately $20 to nearly $500 intraday within two weeks, some asked why the company did not capitalize on the demand by issuing shares. At Zeo, we saw this as a potentially notable governance case study. While some directors did make a few stock sales at much lower prices, the company itself did not take advantage of the markets at that time. Some governance advocates might even applaud the company for understanding that it would be wrong to benefit at the expense of retail investors who could lose substantially when the stock returns to a more fundamentally reasonable price.

It is also possible, however, that the company acted out of fear, worried about the image of profiting from Main Street investors who might not have understood the underlying fundamental value of the stock, which even the company could have determined was much lower than the $483 where it traded at its highest point on January 28. We suspect it wouldn’t take much for this to have become a public relations debacle for the company, but even if this less altruistic reason was indeed the consideration, we agree with the decision.[1]

Should investors take any of this into consideration? The debate over the importance of ESG factors has two major factions. There are those who believe any priority placed on ESG factors comes at the expense of investment performance and always will. We will call them the Cynics, as there is an inherent distrust that doing good and doing well can coexist as motivations. On the other hand, there are those who believe that, at some point, the world will see that ESG priorities are good and necessary, and eventually the default assumption of both investors and companies will be to prioritize ESG factors. We will call them the Idealists, as there is an inherent expectation that today’s progressive ideals will be tomorrow’s prevailing truths - it’s just a matter of time.

This battle between the Cynics and the Idealists is one of ideology. Neither is likely to convince the other that they are wrong for the simple reason that they are starting from fundamentally different views of what motivates people and companies. And in some ways, they are both right. The Cynics are probably justified in saying that a focus on ESG will not put an end to fossil fuels or casinos anytime soon. The Idealists are equally justified in their view that recent increases in boardroom representation of women and minorities (in part due to their activism) will become the norm for companies at some point in the future. But this presents a rarely discussed conundrum. If both are correct in at least some of their basic assumptions, neither can be correct about their overall ideology or vision of the investing world, now or in the future, as ESG continues to mature.