Nike signed Colin Kaepernick to a major endorsement deal in 2018. As readers doubtless remember, the combination of the former NFL star with the one of the world’s foremost shoe and apparel brands reeked of politics and politicking. Nike had gone “woke,” or whatever the word was then for lefty posing by corporations.
Where it becomes perhaps a little bit interesting is that Nike shares subsequently outperformed the S&P 500. While Nike’s valuation rose 103% in the three years following its splashy, high-profile deal with Kaepernick, the S&P rose 56%.
Is this a signal that “woke,” or DEI, or ESG style investing makes sense? Who’s to say? Consider what’s happened since. If we track Nike’s share performance from 2018 to the present, its shares are up a rather slight 22.5%. Over the same timeframe, the S&P is up 75%.
Nike, Kaepernick and the S&P are worth contemplating in light of a recent Wall Street Journal headline indicating that BlackRock is retreating from the acronym “ESG.” It seems the promoters of the “woke capitalism” narrative have won the debate?
About this, readers won’t find a defense of ESG or DEI in this write-up. Right or wrong, the view here is that prosperity is the single best way to achieve any supposedly laudable social outcome. When we’re prosperous we have much more time and money to care about the environment for instance, and on the matter of diversity, a growing economy is the most certain way to happily elevate all sorts of narrow (think diverse) skills and intelligence that are invariably suffocated by reduced prosperity.
At the same time, U.S. prosperity is enormous by any rational measure. Since it is, it’s only logical that some investors are going to desire different approaches to investing. When we’re rich we have more money to lose, or at least experiment with, and perhaps some of the experimentation will reveal itself through capital flows to investment strategies that prioritize specific values over returns.
It’s something to think about with major mutual fund firms like BlackRock, Vanguard, T. Rowe Price, and State Street top of mind. With prosperity yet again the watchword, it’s arguably not surprising that more and more investors will want to match their investing with their political or moral values. And it’s similarly not surprising that the giants mentioned would respond to investors' evolving needs.
This isn’t an endorsement of ESG or DEI investing as much as it’s a comment that mutual fund firms are in the business of profit, and as such they’re in the business of offering customers a full suite of products as a way of gaining more customers, but also enhancing their wallet share of existing customers. In which case, why the outrage over ESG, DEI, or any other themed form of investing? Isn’t themed investing rooted in meeting or leading the needs of customers the most laudatory form of diversity for it being powered by market forces?
While BlackRock is free to retreat from ESG-like acronyms with publicity and profits well in mind, it’s kind of unfortunate that there was ever pushback in the first place. That’s the case because if BlackRock and other large mutual fund firms had really and truly gone in the direction of sacrificing returns at the altar of “woke,” their doing so would have been a market decision. And it would have been one that would have lost them customers if the investment strategy had resulted in lower returns. Or maybe not.
While it’s doubtful, it’s entirely possible that retail investors have reached a stage at which they’re willing to lose out on returns in return for matching their investments with their values. If so, what’s there to complain about? Think about it. For decades, the richest of the rich have invested alongside venture capital firms fully aware that the vast majority of those investments wouldn’t bear fruit. How lucky we were and are that the very rich are and were willing to risk copious sums on the impossible. Since they have money to lose, every so often a world and life-changing gem will emerge from all the failed investments. In other words, Google, Facebook, Apple, Amazon, Microsoft, Tesla, Nvidia were all initially expected to fail.
Just the same, it’s possible that investing styles informed by a fear of the theory that is global warming, diversity, social justice, or name your cause will similarly fail. Or again, maybe not. Indeed, it's possible that ESG and DEI focused businesses might capture the needs of evolving consumers, best-of-the-best workers, or both on the way to market-beating returns. Will they? That’s the point of investing. We simply don’t know, at which point we discover what we don’t know by investing.
It’s a long way of saying that retreat from ESG is arguably as dumb as ESG might be. Better to learn why something is foolish or smart by exposing it to the white hot glare of the marketplace, rather than retreat just because a new approach offends some or many.
