One of the great ironies of modern asset management is the way Warren Buffett is beloved by Berkshire Hathaway shareholders and casual market participants and yet his company fails to qualify for inclusion in most portfolios that celebrate efforts to create long-term value for investors and the world around them.
Sometimes that's a good thing. Berkshire Hathaway (BRK.B) has been a substantial drag on the S&P 500 this year as Buffett's bets on oil and pipelines backfire. Funds like Global X Conscious Companies ETF (KRMA), which don't consider Berkshire Hathaway part of the investable universe, are giving investors a better return.
This isn't about dirty energy and climate change, even though giants like ExxonMobil Corp. (XOM) don't make the KRMA list either. It isn't even about red flags around the big banks Buffett loves: while Wells Fargo & Co. (WFC) isn't in KRMA, Bank of America Corp. (BAC) and Citigroup Inc. (C) make the cut.
Buffett's personal moral standards or even his investments aren't a factor. Nobody faults him for building the Berkshire portfolio around tangible cash flow. He simply isn't interested enough in long-term moral impacts to present investors with a clear environmental or socially progressive view of Berkshire operations. And as for governance, he has never been eager to share responsibility, so there just aren't enough independent directors to get in his way.
Again, his honesty, expertise and compassion don't enter into the calculations. You have to make an effort to earn your way into KRMA's universe so Buffett is far from alone here. At best, only 40% of eligible stocks even qualify for a second look.
If Berkshire Hathaway were to make it onto the screen in the first place, KRMA would then evaluate the company's ethical footprint across all relationships to make sure that customers, employees, communities and suppliers are enriched as well as shareholders. Create the most value across that matrix, and a company can earn a slot in the portfolio.
Investors with a utilitarian orientation can recognize that value tends to feed value and ultimately better investment outcomes. As Andrew Little from Global X recently wrote:
Tangible examples make it clear that corporate behavior impacts the world around us – socially, environmentally, and economically. Sustainable investing techniques incorporate these considerations to create robust, long-term assessments of companies’ value. Despite sustainable investing’s growing popularity, in our view, the peak is not yet in sight. As data improves and awareness broadens, we expect sustainable assets to grow in the years to come.
Previous screens simply struggled to "do no harm" and were left behind. Funds like KRMA allow shareholders to benefit from the network effect of "doing good." Since Buffett reserves his good deeds for private life, his business operations at best minimize negative impacts on the world around them. That's just not good enough for today's impact investors.
At its most basic, "moral" investing (whether marketed as socially conscious, sustainable, values-oriented or delivering a targeted governance "impact") revolves around people who want to support behaviors they consider beneficial while abstaining from those that make things worse. It's really that simple.
The complication arises when we debate whether these extra-economic choices get in the way of investment performance. Advocates say that by definition, sustainable practices create long-term value and build stronger organizations. Detractors argue that thinking beyond the immediate balance sheet can distract management from the demands of pure capital while incurring costs along the way.
