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Mihail Amarie
16 Nov 2022

The Smart Money on ESG’s Refugees

New firms like Strive offer values-based opportunities outside the Wall Street bubble. Can they source the talent to deliver?

The Smart Money on ESG’s Refugees

This fall, Missouri became the eighteenth state to divest from BlackRock due to its embrace of ESG. Nine states, including Texas and Florida, are now banning certain in-state public investments from considering “environmental, social, and governance” factors when making investment decisions.

Sometimes wishfully, ESG’s critics have warned that corporations which “Go woke go broke.” That dynamic is definitely biting into BlackRock’s bottom line. But the investment management behemoth has been content to absorb the loss. They aren’t budging.

The landscape is more complicated than friends or foes of ESG might like. Despite the strong backlash, key ESG sponsors are digging in. Sizing up future trends, including opportunities to profitably realign investment, demands a better understanding of what’s animating the opposition. Is the backlash purely negative? Are people running away from the concept of investing based on values altogether, or are they content with a plurality of values so long as it offers them more options to choose from?

A would-be cultural monopoly

With the recent rapid adoption of ESG in investing, the wider investment community has been left with many unanswered questions about its purpose, necessity, and opportunities. Demand for values-based investment instruments is high, but even on those terms, ESG has many shortcomings. 

The main problem is in its ambitions and the animating spirit behind them. ESG, like the activist firms that support it, tries to position itself as the sole player in the field, and to cast the value it represents as the only acceptable set of values. Many values that it brings to the table are aligned in some general way with the West’s traditionally cherished principles of beauty, truth, and goodness, but ESG’s claim to supremacy even in the controversial particulars of its interpretation of ultimate values is dangerously arrogant. By the standards of most Americans and Western tradition, the dominant interpretations imposed in ESG’s name of what counts as the highest values are poorly aligned with our culture and principles. Market players attuned to the limitations and risks of investing according to the model that results are increasingly likely to follow the lead of the many independent agents who have begun filling the industry space with alternative values-based investment options. But the opportunity to break ESG’s would-be cultural monopoly won’t wait for hesitant players. They should act now, before it’s too late.

ESG’s main problem is that it works by seizing the authority to arbitrate what values are universally acceptable. Even if the values it prizes are good in theory, values like not undermining legitimate government, when raised above the reach of the democratic process, they create and harden a super-position of unchecked power. However well-intentioned, leapfrogging the norms ESG purports to protect is sure to attract ambitious and corrupt bad actors, worsening the legitimacy problems many Western regimes and global corporations already suffer. Citizens and consumers will be justified in demanding that, if their ruling class wants to implement certain values, it should limit itself to using the powers given to them by law, refraining from using private economic power to enforce rules of governance created outside the governmental process. ESG overreach gives ammunition to critics who insist that the true interest animating the standard is not even advancing favored values but simply stamping out any opposing values.

New currents

Fortunately we already see a host of alternative offerings in the values-based investment space. While there are many legitimate, well-intended entities within conservative values investment, it’s not immune to grifters. To be sure, there aren’t too many public stocks out there that are strongly promoting Christian or conservative values – although, to highlight one exception, just earlier this month a new ETF (exchange traded fund) named YALL (the God Bless America ETF) popped up, offered by Toroso Investments, LLC. If you look more thoroughly through its constituents, you can see names like Tesla, Nvidia, Costco, or Mondelez.

A more established name willing to bet on the rising demand for more options in values-based investment is Strive.

Strive is a new asset management firm – it’s still in startup mode. Its founder, Vivek Ramaswamy, is the author of Woke, Inc: Inside Corporate America’s Social Justice Scam. While he doesn’t have much experience as an asset manager, he has a good proven track record as an American entrepreneur in the healthcare and technology sectors. 

The company is based in Columbus, Ohio, well outside the Wall Street bubble. The location comes with pros and cons: the advantages of getting out from under New York City and the prejudices of its financial sector are real. Strive’s posted lineup, tilted more toward marketing, doesn’t suggest the company is positioned to move into investment banking quite yet – and that posture squares well with its independence from Big Finance. But the reliable talent needed to build systematically traded strategies from scratch, which Strive will need if it does plan to move towards active investment banking, are in far shorter supply, quickly becoming scarce and costly as hires are made. 

Under the hood

All Strive’s present offerings are passive ETFs – buy-and-hold long positions with fixed predetermined percentage allocations. The portfolio is not actively managed: positions aren’t affected by market moves or new information, unless the formula that determines the allocation percentages is discretionary amended. 

Strive’s first such product is the DRLL ETF, a passive US energy ETF. The largest allocation in the basket goes to Exxon Mobil (XOM) and in total it has fifty-three constituents, all American energy companies. Second to DRLL is the STRV ETF. As the name implies, this is going to be positioned as the flagship offering of the firm. It is a passive basket of 500 American large-capitalization companies, which make it quite similar to the S&P 500 in scope. The largest allocation in STRV is held by Apple (AAPL). The last entry in their offerings list is SHOC, a passive ETF made up of American semiconductor corporations. It has thirty-one members in its basket, with the largest share being allocated to Texas Instruments (TXN).

Since its debut, DRLL has been a winner, outperforming the S&P 500 index by about twenty percent. The same cannot be said about STRV, which has hewn much closer to the benchmark. The S&P 500 index is down almost twenty-five percent year-to-date, so that’s been a real drawback. One should expect that, with many more results like these, the general appetite for passive long-only funds will be diminishing, at least during the near- to medium-term future.

Accordingly, Strive is considering expanding its offer into actively traded ETFs and, in this way, moving towards the investment banking space. That’s a plan they should consider speeding up; the sooner they execute, the sooner they can attract both investors seeking alternatives to poorly-performing passive funds and more sophisticated high net-worth individuals who care about solid, time-tested values. And, increasingly, many private pension funds, and state funds like Missouri’s, that opt to place client money into investment instruments that don’t militate against the commonly-shared values of their constituents. 

The takeaway

Columbus is attractive to newcomers willing and able to relocate, and continuing expansion in remote work certainly grows the pie of potential talent that companies like Strive will seek and, increasingly, compete for. But size still matters. Columbus is America’s thirty-second largest metropolitan area, and cities elsewhere outside the coasts face similar population dynamics. Finding strong talent aligned to core values will be an ongoing challenge without equally strong connections to communities and organizations that can effectively filter and surface top candidates at scale. If Strive can crack that code, they’ll be poised to unlock serious upside – and remake values-based investment markets in the process.

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