ESG’s confederacy of the weak-minded and strong-willed

Dan Harris, managing partner at law firm Chancery Advisors, gives his honest take on exclusion policies


Dan Harris, managing partner, Chancery Advisors

This week, in ESG world, there is a widespread re-think of sector-based ESG policies. 

In a moment of almost childlike wonderment, investment managers that had excluded defence stocks are now realising that they can, in the right hands, actually protect human rights.

It is baffling that exclusion lists are only now being seen as a crude and blunt tool. The need for defence may have illustrated the point, but there are many other examples. A tobacco company, for obvious reasons, is often excluded from investment portfolios. Yet if a tobacco company repurposes one of its research and development subsidiaries for Covid-19 research, those boycotting the tobacco company are immediately schooled in how things are rarely black and white.

Exclusion lists suit the weak-minded and the strong-willed.

An honest appraisal of most investment management firms will reveal that their businesses pre-date ESG considerations. They are geared towards assessing and managing financial risk in the traditional sense. This makes them heavily reliant on third-party providers for assessing and measuring ESG factors. The format of an off-the-shelf exclusion list is attractive to them: it is easily and cheaply operationalised.

For those pushing a particular agenda, which include lunatic fringe idiots staffing discredited NGOs, they have identified lists as the means of weaponizing their politics. They play up to boilerplate ESG policies, which are often “high level and unilluminating”, to quote Guy Opperman MP. Exclusion lists, by definition, offer a simplified narrative, ultimately reducing the issues to a stark list of companies. This starves portfolio managers from considering the nuance.

Those strong-willed activists that lobby for companies to be included on such lists recognise this. The lists allow them to steer recipients away from the complexity of the issues that undoubtedly exist, and gloss over what they don’t like. That’s not greenwashing; it’s mudwashing.

Life is nuanced and complex. A portfolio manager’s job is to distil all of the noise down to a decision to buy or sell and do this through the medium of other people’s hard earned money. An exclusion list applies a blanket rule that prevents them from even processing the noise.

Third-party lobbyists behind these lists know that where the size of the target position is immaterial relative to the investment portfolio, the weak-minded investment manager has little incentive to look behind the list to test its veracity.

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