Our View on ESG Investing

American economist Milton Friedman penned in his famous 1970 essay that the sole social responsibility of a business is to increase profits.

However, this prevailing view was written into law long before Friedman. The Michigan Supreme Court’s 1919 decision in Dodge v. Ford Motor Co, held that “a business corporation is organized and carried on primarily for the profit of the stockholders.”

Recently, however, an alternate view was developed that focused on social factors as much as profit. Known as Environmental, Social, and Governance, or ESG, this framework holds corporations accountable to additional stakeholders: customers, employees, suppliers, communities, and the environment. 

ESG proponents believe corporations that “do good” will also do well – or better - for their shareholders. ESG, promoted as socially progressive, quickly became the hot new marketing slogan for funds composed exclusively of purportedly ESG-compliant companies.

But there is no SEC list of ESG criteria. Promoters are free to label any company they want as ESG-compliant. Some companies, such as fossil fuel giant Exxon, have used ESG rhetoric to greenwash investors into believing they are eco-friendly despite increasing carbon emissions. Firms were piled into so many ESG funds that Aaron Brown, former head of financial research at AQR Capital, wrote in a 2021 Bloomberg article, “Many ESG funds are just expensive S&P 500 indexers.”

NYU’s Stern Center for Sustainable Business analyzed over 1,000 studies of ESG performance published between 2015 and 2020 and found only 33% of ESG investments outperformed non-ESG investments. The other 67% showed no difference, mixed, or negative results.

At DCM, we believe protecting the environment, being socially responsible, and following sound corporate governance principles are all positive qualities. However, we don’t look for good or bad when investing your funds. We focus on bullish vs. bearish.  We prioritize proven security, income, and growth of your invested assets. Until ESG is a regulated, standardized designation and evidence shows that ESG firms consistently outperform, we will not include ESG in our investment considerations.

This report was prepared by Donaldson Capital Management, LLC, a federally registered investment adviser under the Investment Advisers Act of 1940. Registration as an investment adviser does not imply a certain level of skill or training. The oral and written communications of an adviser provide you with information about which you determine to hire or retain an adviser. Information in these materials are from sources Donaldson Capital Management, LLC deems reliable, however we do not attest to their accuracy.

An index is a portfolio of specific securities, the performance of which is often used as a benchmark in judging the relative performance to certain asset classes. Indexes are unmanaged portfolios and investors cannot invest directly in an index. An index does not charge management fees or brokerage expenses, and no such fees or expenses were deducted from the performance shown. Past performance is not a guarantee of future results. The mention of specific securities and sectors illustrates the application of our investment approach only and is not to be considered a recommendation by Donaldson Capital Management, LLC.

S&P 500: Standard & Poor’s (S&P) 500 Index. The S&P 500 Index is an unmanaged, capitalization-weighted index designed to measure the performance of the broad U.S. economy through changes in the aggregate market value of 500 stocks representing all major industries.