Are ESG issues the concerns of our fellowship of Foolish investors? Are they a burden that will spell doom for your returns? Or is it fair to say that when it comes to business, there's some good in this world, and it's worth investing for?

A full transcript follows the video.

This video was recorded on March 13, 2019.

David Gardner: Welcome back to Rule Breaker Investing. All right. I think you know what the show's about, and I hope to the point. Does ESG work?

My friend Patrick O'Shaughnessy was asking that question on Twitter over the course of the last week or two, just finding out whether people thought that this form of investing, which I'm about to lay out for you, whether it's the right way to go. Patrick likes to sponsor debates between people, which I think is wonderful. I'm not planning on weighing in on that debate unless he wants to invite me, but I figured since I have a podcast, I can speak directly to you about it.

Let's first break down our term "ESG." This is kind of a buzzword right now. It's an acronym for "environmental, social, and governance," factors that you would consider if you were investing as an ESG investor. Rather than just look at the financial factors, the financial returns that you're hoping for, if you're an ESG-focused investor, you also care about the environmental factors behind that company you're thinking of buying stock in, the social factors, the governance displayed or exhibited by that company. Those are all factors that some people think are important. They have a website like Morgan Stanley's. Morgan Stanley has a website dedicated to ESG, ESG 101 -- what is ESG investing? Walk along the path with us through the world of environmental, social, and governance investing, Morgan Stanley invites you to do.

Last week on the podcast, one of my tips, tricks, and life hacks right up top of the show was to tell the story of Dave Barry teaching technical writing and saying, "Lead with your interesting conclusion." So, let me be consistent with that. Here's my answer. Does ESG work? Of course!

I think I could even go back to the very first issue, the very first edition, of The Motley Fool Investment Guide, which my brother Tom and I wrote in 1995. Since it takes months to actually get books from a finished manuscript to the shelves, it got published at the start of 1996. Right in that book, I penned a section talking about socially responsible investing. The angle that I had back then is consistent with what I'm going to share with you today. That is that if you really want to be socially responsible with your investing, if that matters to you, if ESG, and F, the financial part of it, too, if those factors matter to you, then I think that the most socially responsible thing that you and I can do with our investing is to put our money where our money is! Put your money where your money is. You could also put it where your mouth is, if you like, with the rest of the world, but I'm talking about putting your money where your money is. What does that mean? It means that I believe that your investment dollars -- I sure hope you've saved some. If you're listening to this podcast, you probably have, and you're thinking about how best to invest those dollars. I hope that you'll take those dollars and have your investor dollars follow your consumer dollars.

Peter Lynch made this concept famous. It's the "buy what you know" mentality. We've always loved that from Lynch. We've always used that ourselves. Frankly, in our case, we didn't need Lynch to teach us that because our dad did that for us and his dad before him, all investors in our family. We've always believed in investing in the things that you use.

What was the biggest stock that our family had growing up? As a little kid, what was the Netflix or Amazon of my time, of that era? Well, at least for our family, it was the Washington Post Company. I grew up in Washington, D.C. I'm born and raised right here in the nation's capital, Washington, D.C. That was our local newspaper. It was also a brilliantly run company. Warren Buffett was on the board of directors. The Graham family was behind The Washington Post; you may have seen the Katharine Graham movie. It's obviously a famous company. It was really famous back then.

Now, of course, the world has changed some. Jeff Bezos now owns The Washington Post. But that was the stock that we were raised on as kids. That was our biggest holding. It was our best performer. It was our local newspaper. So, by reading the paper every day, and going right to the sports section, and checking stocks, as I did as a teenager -- back then you needed a newspaper to check your stocks. That's really dating me right now. Of course, all the stocks were in fractions, not decimals. That was my experience of The Washington Post as a kid. So, unbeknownst to me, I wasn't really thinking about it back then, but thanks to my dad, I was putting my money where my money was.

I guess it reminds me of one of, I hope, what'll end up being a notable quotable from me. I've certainly said it before on the show, I'll be saying it again in the future. In this case, I'm reading off somebody else's Twitter page. As long as I'm giving out free ads this week, I want to thank @simonspear on Twitter. Simon has this quote pinned up as his pinned tweet. This is from July of 2018. Simon, thanks for keeping this pinned to your Twitter page since last July. I hope I'm worthy, maybe at least until this July. He's quoting me saying this: "Make your portfolio reflect your best vision for our future. Always be thinking ahead. Be optimistic. Think about the world that you want to create because sure enough, your dollars and mine, our capital, is helping shape the world."

I do see something else on this Twitter page, and that is a link to a beautiful website. Here's some free pub for my man, @simonspear: Take a look at that gorgeous website and you'll see that View from the Blue Productions is an independent natural-history production company specializing in underwater filming. If you want to see a gorgeous website, You'll see that their client list includes the BBC. They've won 30 international awards, etc. That sounds like a company I'd like to invest in. That sounds like a company, to me, that is making our world better. Again, the most socially responsible thing that I think you and I can do with our investing is to put our money where our money is.

Now, slightly less financially responsible is just to invest your money in a fund. Certainly a lot of us do that. It's not financially irresponsible at all. Not a lot of us want to buy stocks directly, perhaps, or we like to find a good fund where we could put our money, not think too much about it, not have to be experts at this and think that our money is being well-invested by somebody. I think it's a perfectly good answer much of the time, although if you really are diligent about your degree of social responsibility, I would encourage you to make sure you know darn well what's in that fund. If you really care about where your dollars are invested and you're not going to invest directly in stocks, I think you owe it to yourself, and not just to you, but to me, and to all of us, to make sure that your money is well-invested -- is, as I say, making your portfolio reflect your best vision for our future. I think the most socially responsible thing you and I can do is invest directly in stock in the companies that we love, that we think are shaping the world for the better. One step down from that is just giving it off to a fund and doing the ESG investing thing without investing directly.

As long as we're going down a ladder briefly, we're going to get back up, I hope reach the stars by the end. We're going to go a little deeper here. What is less financially responsible than that? I submit to you: Less financially responsible than that is not to invest at all. In fact, if I'm recalling my biblical parable of burying your talents, my recollection is that the servant who just took from his master the talent and buried it was treated worst of all. He was the one guy who didn't do anything with his talent. I love the word "talent," because of course, it's a pun in English anyway. You can think, are you using your talents, your natural aptitudes or skills, in addition to your money? It's a great parable. It's probably one of my favorite parables. The one guy who doesn't do anything with it, they say, even that now will be taken away from you. You need to do better with your investing, somewhere back there in Matthew or Luke. It's a great lesson! So, I think one step of the ladder down is just not to invest at all. That's more financially irresponsible.

The bottom rung, I want to speak to very briefly; that's not even to save. Less than that, the worst position to be in of all, is not even to save, not to be able to support yourself, let alone a family. I need to speak to that in two ways, very briefly. One is when it's understandable that you can't. Many people around the world are simply unable to save. There are a thousand reasons why. To those people, we all are working our hardest to help them be able to save. But there's a second group of people who could save but who are not. I also want to speak to that group of people. Sometimes I see statistics, I don't know if they're real or just fake news, that millennials aren't as interested in saving, or saving isn't as meaningful to the next generation. While I think part of that may just be the folly of youth, and as we all grow up we start realizing the importance of it, and I trust that will happen for the generation, but it's somewhat ironic to me -- I think I've said this once or twice before on Rule Breaker Investing -- that a generation so concerned with sustainability, if you think about environmental sustainability, I think your own personal financial sustainability is just as important. In fact, if you don't become financially sustainable, by definition, you're going to rely on others to help you get by through life. Again, there are many people for whom that is a reality. I hope we have a safety net in place for them, and we're all doing our best charitably to support them. I'm certainly trying to do my part. I hope you are, too. But for people who could save and are not, that, I think is the most financially irresponsible place to be.

Now let's get back up to the top of the ladder. I'm just going to ask it again: Does ESG work? I'm going to say again, of course it does. Now, your E may not be my E. Your view of the environment or what's important probably isn't mine. You may care more about the oceans or less about the oceans than I do. Each of us is seeing different things out there. Your S, your social view, social factors, is almost certainly different from mine. There are huge congeries of different S-es. Congeries, that's one of my SAT words. I think it means a great big pile; it's just a really fancy way of saying a great big pile. Congeries of different S-es, social factors out there. Some of us will value some of them more than others. I know we're different with our E. I know we're different with our S.

We may not be that different with our G, governance. What we look for in governance is probably more standardized and more consistent from one of us to the next. Certainly, in the United States of America, we count on being able to believe the financial statements that are being audited by firms and reported on a quarterly basis, which is a nice reporting rhythm that I like. I know some other areas in the world favor only doing it twice a year. I think that would be a real loss of information. That would be like, if you're a sports fan, you're only getting to see the result of every other game and trying to decide who's the best team. I really like our quarterly approach to governance. Of course, governance includes things like how many men or women do you have on the board or in leadership? There are many other factors. Some of those are social, some of those are governance. Each of us sees these things differently, which is why I've said -- and I said it earlier -- I think the most financially responsible, socially responsible way to invest is to invest directly in the things that you know you support.

So, does ESG work? Well, let me share with you some of the ways that ESG has worked for me. My best stock picks are all companies that I think make the world better. I realize I mention these names from time to time because it takes a while to unseat these picks. Once something outperforms Netflix, I'll start talking about that as my best investment. But as of now, for Motley Fool Stock Advisor members who bought with us in December of 2004 and are still holding today, Netflix is up 19,469%, which means it's up 195 times in value. That's a company that is a wonderful company, adding so much happiness and intelligence into the world. That passes my ESG screen. Now, if for some reason it doesn't pass yours, I'd be the first to say don't invest in it. But, yeah, Netflix up 195 times.

Amazon up 106 times. Booking, that's the former Priceline, is up 80 times in value. Marvel, which I first picked as a big comic-book fan as the Spider-Man movies came out, is up 61 times in value. All of those are from 2002, 2003, and 2004. All are still actively held. By the way, another ESG consideration around your investing: I would ask how often you trade or not. At least for me, it feels better to passively hold for long periods of time. I think that's not only more Foolish and will give you better performance, but it's also just a simpler world. We don't need to trade in and out to do really well as investors.

While I'm conscious that all those picks are now years old, and you might think, "I wasn't around. There was no podcast Rule Breaker Investing back in 2004 that I could have bought Netflix." Well, how about some more recent picks? The gains aren't as spectacular because we haven't held them as long. Match Group, which I started talking about on this podcast a few years ago. Recommended to Motley Fool Stock Advisor in 2016. It's up 269%. That's a great company, adding a lot of value to our world. How about Vail Resorts? Talk about the environment, just the gorgeous ski resorts that Vail owns around the world. It's not just a U.S. domestic company. Ticker symbol MTN. We recommended that in 2013. It's up 253%. How about, from a totally different direction, ticker IDXX, Idexx Labs? Recommended in June of 2014 in Stock Advisor. Up 219%. They're basically helping the animals of the world out with vaccinations and parasite screening and all kinds of tests done by veterinarians to help Fluffy the cat or Spike the dog lead a better life.

Every one of the companies I just listed for you passes my personal ESG screen. It may or may not pass yours. My point is, does ESG investing work? Of course it does.

One other thought this week. It's a shorter podcast this week. By the way, next week, we're going to be playing the Market Cap Game Show! It's that time in the quarter, the end of the quarter. I'm really looking forward. I think I'm going to have Emily Flippen come back, since she set the all-time record on our Market Cap Game Show last time. We'll see if Emily is around. But back to my final thought for this week, not only that, not only does ESG investing the way I'm describing it -- the way you and I can practice every day, week, month of our lives -- not only does that work, but here's something else that works, tightly connected, ESG businesses work, too.

Warren Buffett famously said, and it's our biggest quote blown up here on the walls at Fool HQ, "I'm a better investor because I'm a businessman and a better businessman because I'm an investor." I've always loved that line, probably because my brother Tom and I started this business. As I've sometimes said to investors in the past, maybe the best investment lesson I've ever had was just to start a business myself to try to do some good in this world. Which, by the way, reminds me of one of my favorite quotes that I think I'll close this podcast with this week. To do some good in this world. It was the act of starting a business that really awakened me, it opened my eyes to thinking, which other businesses do I want to trust my money with? And you know what? Early on, I decided, we're trying to do some good in this world here at The Motley Fool and I'm going to invest in companies that I think are doing good in this world. I've been doing that ever since, for more than 25 years.

When I say ESG businesses, I think a lot of you will recognize the phrase -- I use it a lot on the show -- conscious capitalism. I am on the board of Conscious Capitalism. I am a conscious capitalist. I love the ethos. I love the people that are all connected in with the movement. So, of course ESG investing works, just like of course conscious capitalism works.

Now, the quick short course, the four things we're looking for in any consciously capitalistic business.

The very first one, you can generally find it on their website if they thought about it: What is the purpose of that business? Of your business, my business, or the one we're going to invest in? What is the mission statement or purpose of that business?

Second, is that business, your business and mine, are we trying to create a win for all of our stakeholders? Not just for one group of stakeholders, not just for the shareholders, not just for the customers. We should be treating our employees well, too. We want to be creating a win for the people that are making our businesses happen every day. We're going to try to create wins for our customers, our employees, our partners and suppliers, we'd sure better be winning for them. How about the environment? Well, for some businesses, that's really very relevant. Communities for other businesses, neighborhoods, that's really relevant. Here's another great stakeholder to create a win for: shareholders. It's not just for shareholders, but shareholders sure do count. I've written about that before. It's the businesses that are creating wins for all of these -- that, by the way, often have the best stocks, the kinds of returns that I was sharing with you earlier, when you just find these businesses early and hold them for long periods of time. That was No. 2.

No. 1: purpose; No. 2: stakeholder orientation.

Three is conscious leadership, which I think is synonymous with servant leadership, a phrase I know many of you have come across, and I bet you live that life. I sure aspire to do that myself.

And finally, fourth is conscious culture, the culture of the work environment that you're creating every day with your employees and for your employees.

So: purpose, stakeholder orientation, conscious leadership, conscious culture. That's what an ESG business looks like. Again, if you go back to that great Buffett line, we're going to be better investors when we're businessmen, and better businessmen because we're investors.

This is not a show just for entrepreneurs. I'm not just here to talk to people who have started a business. I believe every one of us is a leader if we're in a workplace doing important work. You don't have to be an entrepreneur to understand the importance of ESG investing and conscious capitalism and doing business right. Every one of us can do it in every aspect of our lives.

When I'm talking about conscious capitalism like this here at the close, I'm also thinking about conscious consumerism. I hope you enjoyed Paul Rice on the podcast a few months ago. He was talking about the coming wave -- I think it's already started -- of people who are specifically buying this product from this business, not that one from that business, because this product from this business is something that they admire and want to support. Something great that we can say about a lot of millennials -- and I think Paul said that on this show -- is that a lot of them care more than maybe you or I did -- I'm 52, so if you're my age or older, maybe your kids or our kids care more about who they're buying from and what they're buying than you and I did back when we were their age, which I think is a tremendous asset and feature of this new generation. I hope it will always remain true. Paul Rice predicts, not only will it remain true, it will become a necessity, an increasing necessity. If you want to succeed as a business, what I'm describing using some new terms for some of you -- the phrase "conscious capitalism" may sound hunky-dory, funky, hippie, crazy, I'm not really sure. Some of you may already get it. But I believe what I just laid out for you in the last few minutes is going to become de rigueur, it's going to be table stakes over the next generation. Businesses that don't adopt these principles, don't act this way, will be put out of business by competitors who are acting this way. I predict that happens in virtually every industry on the planet.

Those of you who are tuning in to this podcast -- and thanks a lot! -- in the year 2039 -- I hope I have at least one listener who came back and heard this. I predict that what I've just said, you're shrugging your shoulders going, "Yeah, that's the way it is everywhere around the world today. That's the only thing that would have survived over the last 20 years, excellent business because it's a competitive world out there."

So, does ESG investing work? You betcha! Does doing business by those very principles, does conscious capitalism work? You betcha!

All right, I have my favorite quote to read for you this week at the end of the show. Just before I get there, I want to point out that probably the world's largest asset manager in a much-publicized letter about a year ago, Larry Fink, the CEO of BlackRock, wrote a letter to all the CEOs, all the corporate leaders in America, and said some of the following things. These might sound familiar to listeners of this podcast or fans of conscious capitalism. This comes from somebody who's overseeing the investment of $6 trillion or so every year.

Let me quote a little bit from Fink's letter. He said: "Purpose is not the sole pursuit of profits, but the animating force for achieving them." That's a great quote. We agree. Here's another great quote: "Profits are in no way inconsistent with purpose. In fact, profits and purpose are inextricably linked." That's also a great quote. Third, and the final one I'll pull from Fink's letter: "Companies that fulfill their purpose and responsibilities to stakeholders reap rewards over the long term."

I hope each of those three, if they didn't feel obvious at the beginning of this week's podcast, I hope they feel like statements of the obvious now, here at the end of this week's podcast. Thank you, Mr. Fink, for being a great exemplar to corporate leaders. And thank you, dear Rule Breakers, for listening to us, staying with us, being invested with us in these kinds of companies, as we have done for decades.

Earlier I said maybe the best investment lesson I've ever had was to start a business to try to do some good in this world. It did remind me of one of my favorite quotes. I said I would close with it. One of the things that John Mackey does in his book Conscious Capitalism is, he talks about the hero's journey of the entrepreneur. Now, for someone like Mackey, and indeed, for somebody like me, a lot of our heroes are the entrepreneurs who went to create the great businesses of our time. How much value has somebody like Steve Jobs added not just to my life, but to our world? He's no longer with us, but there are a lot of living, breathing great entrepreneurs -- like John Mackey of Whole Foods fame, at least for me, he's one -- who've gone through kind of a hero's journey. I love stories and quotes about heroes. I like people who try to do good in this world. So as I said that, I thought, "That reminds me of Lord of the Rings, The Two Towers, great exchange between Frodo and Sam." If you're a Tolkien fan, I know you're already going to have heard this. It's a beautiful scene in the wonderful Academy Award-winning series of movies that came out about a decade, almost two, ago.

You may remember, near the end of The Two Towers -- I'm not going to summarize the story, not nearly. If you don't know these characters, I'm sorry, but I think you'll love the quote. While passing through the besieged Gondorian city of Osgiliath, Sam reveals that Boromir's death was because he was driven mad by and tried to take the Ring. An attacking Nazgul nearly captures Frodo, who momentarily attacks Sam, his best friend, before coming to his senses, forcing Sam to remind him that they're fighting for the good still left in Middle Earth. This is a quote that means a lot to me. It's the kind of thing that in hard times, you can pick up and read and take another step forward. So, Rick Engdahl, give me some music, and let's get started.

["Samwise the Brave" plays]

Frodo says, "I can't do this, Sam."

And Sam says:

I know. It's all wrong. By rights, we shouldn't even be here. But we are. It's like in the great stories, Mr. Frodo, the ones that really mattered. Full of darkness and danger, they were. Sometimes you didn't want to know the end because how could the end be happy? How could the world go back to the way it was when so much bad had happened? But in the end, it's only a passing thing, this shadow. Even darkness must pass. A new day will come. And when the sun shines, it'll shine out the clearer. Those were the stories that stayed with you, that meant something, even if you were too small to understand why. But I think, Mr. Frodo, I do understand. I know now, folk in those stories had lots of chances of turning back, only they didn't. They kept going because they were holding on to something.

And Frodo says, "What are we holding on to, Sam?"

And Sam replies, "That there's some good in this world, Mr. Frodo, and that it's worth fighting for."


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