Checklist Series, Part 15: ESG, SRI, WTF?

Investment strategy clouded by idealism

Jan 26, 2026

This week’s Checklist Series entry is gonna be a free-form ramble covering the lightning rod of “Environmental, Social, and Governance” considerations.

We call this ESG. Which is not to be confused with “SRI,” (socially responsible investing), although the two terms have become synonymous. The “social” angle is really only one component of the broader whole.

As for the last three letters in the title: yes, I am referring to exactly what you are thinking.

Disclaimer before I get into this: these are my personal opinions only: not those of my employer or anyone I work with. Where my clients have different opinions (and many do), I put my beliefs aside and manage their portfolios in the way that they ask me to.

Let’s get the political stuff out of the way

I personally don’t place “socially responsible” considerations at the forefront of my investment decision making process. It does play a background role, because if you’re looking for a “low risk” investment, you want to reduce the odds of unpleasant situations in the future that may arise because of bad things the company might be doing today.

When you’re trying to do more than that, trying to decide what qualifies as “socially responsible,” context matters. To give one example: in the wake of Russia’s invasion of Ukraine, more than a few SRI portfolios decided it was OK to own defence companies, and that’s perfectly fine with me. Sometimes pragmatism is more important than ideology. But why wait until the war starts to decide it’s okay to invest in a defence company?

Speaking of ideology, I think it’s a mistake to let your politics impact your investment portfolio. Over the past few years, investors on various ends of the political spectrum have demanded that they be divested of companies like Disney, Pfizer, Unilever, United Health, Target, and Anheuser Busch. Oddly enough, when a company is the target of a political attack, and investors are selling for reasons that have nothing to do with a coherent investment case (can you believe they have rainbow flags up in the kid’s section?), it can be a great time to buy that company’s stock. Feel free to take advantage of other people’s various political derangement syndromes to buy solid companies cheap. But to do this, you have to leave your own biases behind as well.

The reason ESG can be important

The way I look at it, evaluating a company’s ESG risk is all about hedging against hidden liabilities or costs that may arise in the future due to things that the company is doing today.

Perhaps there will be future costs to polluting waterways, selling your customers a carcinogenic product, or disregarding the basic rights of your employees. To the extent that there’s this kind of stuff going on, you want to understand the potential risks, and may decide to just sidestep the investment entirely. But you shouldn’t be blind to it.

Why governance matters

The bigger issue with ESG risks is that they can call into question the integrity of your management team, and whether the Board of Directors is actually doing their job of independently representing the long-term interests shareholders. It’s not political. It’s about protecting your investment. And it’s why the “G” is the most important letter in the acronym.

Evaluating a Board of Directors is tough work for the average investor. Start with considering who’s on the Board. What experience and expertise do they bring to the table? Has the Board proven itself to be effective in times of crisis, or is it just a bunch of the CEO or founder’s buddies?

Are they independent of management? Have they pushed back in the past? How many members are external? Is the Chairman role separate from the CEO?

Do they have a record of treating minority shareholders well? (This is particularly important in smaller cap companies where a controlling shareholder may exist.)

Lots of things to think about in this area. As usual, it’s an art, not a science. You won’t know how a Board will react to a crisis until you see them in action, and you can refine your judgment on their effectiveness based on that.

When numbers lie

Unfortunately, “ESG” has become a marketing term. And due to the opacity and judgement involved in determining what good governance actually is, the investment industry has created shorthand “ESG scores”: a rating out of 100 that tries to quantify how “good” a company is. I’m not a fan.

Does the board and upper management have a bunch of women and minorities on it? Does the company broadcast all sorts of feel-good information about how many trees they planted? Or how green their new packaging is? Up the score. There’s even a word for this: greenwashing. A company doing terrible things can score pretty highly, and get a pass from a socially responsible investing strategy, as long as they try to game their ESG scores in other areas.

Performance and values

Last decade, ESG and SRI funds were all the rage. Partially because of great feel-good marketing, but also because the funds performed very well. By eschewing energy names (which had a really rough ride) and loading up on technology, they benefited from the growth in stocks like Apple, Facebook, and Amazon. I was always skeptical, and I remain so. To the extent that a company like Facebook makes money by creating addictive apps that have almost certainly contributed to teenage depression and suicide, how “socially responsible” can they be? I’m not exaggerating when I say that if I could choose between my teenage girls smoking and never using social media, or the status quo, I’d hand them each a pack of Marlboros.

You hear less about these funds now, and it’s partially because their relative performance has not been great, which makes them a hard sell. Also because the political winds have shifted decisively to the right. But in Canada, being more left leaning than the US, I still talk to a lot of people who want to see an ESG element in their portfolios. I explain to them that the cost of doing so, by reducing your range of eligible investments, is almost certain to reduce returns and increase volatility over the long run (as any constraints on diversification would). And as I also say, there is no company that is without sin, and if you look hard enough, you’re sure to find something any company is doing that you’d find unappealing.

This is why I believe that a pragmatic approach to ESG is the right one. A company managed with the long-term best interests of all stakeholders in mind will have a better chance of surviving (and thriving) than a company with a culture of cutting corners and prioritizing short term profits. Your “low risk” portfolio should reflect that. And you’ll naturally end up with a portfolio built out of companies that are more responsibly managed than the average.