The argument isn’t necessarily that investing in ESG funds leads to a positiveimpact, so much as that it avoids a negativeone. For example, consider two hypothetical investment funds:
Invests in the S&P 500 index
Invests in the S&P 500 index but excludes any company which manufactures or supplies landmines
All else being equal I think it’s difficult (although not impossible) to argue that shifting people away from fund 1 and toward fund 2 doesn’t have a net positive impact on the world. So I suppose the debate hinges primarily on whether all else is equal (i.e. in terms of fees, risk, and expected growth) and, if not, how to account for those differences within an ethical framework.
I agree with the criticisms you made but would add that some people who are uninterested in the EA maxim of “do the most good” may be convinced to “do the least harm”. If these people (who won’t be donating their investment gains to effective charities, regardless of how large those gains are) can be nudged towards more ethical products then this could have give a positive benefit.
@Stewed_Walrus, I’m under the impression that you’ve dismissed @Ree’s argument out of hand. I was tempted to start explaining, when I noticed that his brief summary , “The mechanism by which ‘sustainable investing’ claims to have a positive impact is fairly dubious”, already contains mine, if on a much shorter form. If you want to, we can discuss this claim, apart from the rest.
As a subsection of the former, I do not think it is even difficult “to argue that shifting people away from fund 1 and toward fund 2 doesn’t have a net positive impact on the world”, and in fact I have a rather standard, almost FAQ-like answer to it. On its shortest form, it is:
You’re a provider of liquidity, not a primary financier. Buy or do not buy the dirty stock, the company won’t see that money (unless IPO). So, no impact.
If you don’t buy the stock, or sell it if you have it, prices will fall. Another investor, price-sensitive but ESG-insensitive, will buy it (unless universal ESG principles). See, e.g. this paper. So, either no impact, or the impact is giving free money to an unscrupulous investor.
Also, this mechanism you propose might be valid as presented on your previous comment (money managers, pension funds and other providers, who only manage other people’s money, and thus will never give it away to altruism, effective or otherwise), but not as presented on the OP, when it seemed to apply mainly to personal savings.
Re: Ree’s comment, I consider funging a very important aspect of public communication/outreach. People DO want to feel good, and do NOT purchase utilons and fuzzies separately. If you give them a reason to feel good that does not require giving away their money, you WILL get less donations as a result. I have the strong feeling that, on the margin, this effect will at least completely erase any potential benefits than ESG investing may have. If I seem to be too sure on this, consider that any effect your investment has is, by neccesity, dispersed and marginal (the company does not literally take your money and use it to build landmines, and it wouldn’t even if its only business line was landmine manufacturing), while money donated will be used at least mainly and certainly directly to do good. Thus I understand the effects of donations to be, at least, one order of magnitude higher than any ESG effects might be.
The argument isn’t necessarily that investing in ESG funds leads to a positive impact, so much as that it avoids a negative one. For example, consider two hypothetical investment funds:
Invests in the S&P 500 index
Invests in the S&P 500 index but excludes any company which manufactures or supplies landmines
All else being equal I think it’s difficult (although not impossible) to argue that shifting people away from fund 1 and toward fund 2 doesn’t have a net positive impact on the world. So I suppose the debate hinges primarily on whether all else is equal (i.e. in terms of fees, risk, and expected growth) and, if not, how to account for those differences within an ethical framework.
I agree with the criticisms you made but would add that some people who are uninterested in the EA maxim of “do the most good” may be convinced to “do the least harm”. If these people (who won’t be donating their investment gains to effective charities, regardless of how large those gains are) can be nudged towards more ethical products then this could have give a positive benefit.
@Stewed_Walrus, I’m under the impression that you’ve dismissed @Ree’s argument out of hand. I was tempted to start explaining, when I noticed that his brief summary , “The mechanism by which ‘sustainable investing’ claims to have a positive impact is fairly dubious”, already contains mine, if on a much shorter form. If you want to, we can discuss this claim, apart from the rest.
As a subsection of the former, I do not think it is even difficult “to argue that shifting people away from fund 1 and toward fund 2 doesn’t have a net positive impact on the world”, and in fact I have a rather standard, almost FAQ-like answer to it. On its shortest form, it is:
You’re a provider of liquidity, not a primary financier. Buy or do not buy the dirty stock, the company won’t see that money (unless IPO). So, no impact.
If you don’t buy the stock, or sell it if you have it, prices will fall. Another investor, price-sensitive but ESG-insensitive, will buy it (unless universal ESG principles). See, e.g. this paper. So, either no impact, or the impact is giving free money to an unscrupulous investor.
Also, this mechanism you propose might be valid as presented on your previous comment (money managers, pension funds and other providers, who only manage other people’s money, and thus will never give it away to altruism, effective or otherwise), but not as presented on the OP, when it seemed to apply mainly to personal savings.
Re: Ree’s comment, I consider funging a very important aspect of public communication/outreach. People DO want to feel good, and do NOT purchase utilons and fuzzies separately. If you give them a reason to feel good that does not require giving away their money, you WILL get less donations as a result. I have the strong feeling that, on the margin, this effect will at least completely erase any potential benefits than ESG investing may have. If I seem to be too sure on this, consider that any effect your investment has is, by neccesity, dispersed and marginal (the company does not literally take your money and use it to build landmines, and it wouldn’t even if its only business line was landmine manufacturing), while money donated will be used at least mainly and certainly directly to do good. Thus I understand the effects of donations to be, at least, one order of magnitude higher than any ESG effects might be.
Going back to the FIRE angle, you may be interested in knowing what one of the biggest names has to say: https://www.mrmoneymustache.com/2020/08/22/socially-responsible-investing/ (my own take and key citation is ”your spending dollars will probably have a much bigger impact than your investment dollars”)