Content Provided by Rusty Vanneman, CFA, CMT – Chief Investment Officer

Recently, I took up paddle board racing. It has appeal in a variety of ways: the discipline that goes along with training for an event on the calendar, the competitive aspect of the budding sport, plus it’s a lot of fun!

Paddle boarding is a great activity. There’s nothing like an evening paddle. Imagine riding alongside dolphins, which I experienced a few Fridays ago, or cruising the ocean waves (mine are on the Gulf Coast). I’ll never be as good as boarding legend Laird Hamilton, but I thoroughly enjoy trying to get better each time I get on the water. I also enjoy racing.  It helps being an old guy as I’m not really competing against all the crazy-fit younger competitors, but I find some satisfaction in how I’ve done versus the field. My goal is improving each race, not necessarily being the best. I tried to keep that in mind recently as I basically bonked (i.e., ran out of energy) and struggled to finish.

“Progress, not perfection” is a useful saying in many situations. That includes paddle board racing and investing. In particular, I think it’s also a useful and practical way to look at environmental, social, and governance (ESG) investing.

When it comes to socially responsible investing, it’s easy to get behind the idea of helping the world – that your hard-earned money is not going to commercial activities that you don’t believe in. The difficult part of ESG investing, however, is in the definitions. For example, two socially responsible investors might believe in the same concept, but how they define the issue at hand might create dramatically different ways to invest.

How stringently the definition is applied to a company also matters. In other words, how would a multinational company that does a lot of good work for the global economy and local communities, but has a division that violates an ESG definition, rate for investment? Some ESG investors would say they simply cannot invest in such a company. (“In any compromise between food and poison, it is only death that can win. In any compromise between good and evil, it is only evil that can profit.”) But I disagree. If investors want to help change the world through their investment dollars, they should demand progress, not perfection.

This is the way I think ESG investors should look at building ESG-friendly portfolios. They should emphasize companies that are better than average without demanding perfection. Just for the sake of illustration, let’s say the average company in the S&P 500 gets 90% of its revenues from the investor’s ESG-approved activities. Using the progress, not perfection criterion, ESG investors should invest in companies that are above average, not necessarily 100% perfect. If everybody invested like that, it would create a virtuous circle in which the average ESG score for companies should naturally rise over time.

Voting with your dollar is an accepted practice for consumers, so why can’t voting with your investment be the way to invest? Investing is inherently a human enterprise that is loaded with emotion and meaning, and many investors want their investments to reflect their principles. That is increasingly easy to ensure, but a progress, not perfection, mindset will set a more realistic bar for many companies while encouraging them to improve their practices.

Hopefully that progress will encourage positive change over time, and that attitude will also help me win some paddle board races in the years ahead!