There are many important metrics that can be used to measure a company’s impact. But none are more important than the company’s and its senior executives’ political contributions.
Politicians write our laws. They quite literally set the rules for corporations and citizens alike.
And many corporations spend heavily to influence who gets elected. S&P 500 companies and their senior executives alone have given billions to politicians and PACs over the last decade.
Yet almost no thematic ETFs or mutual funds – or even self-managed accounts – consider a company’s politics.
Why is that?
The data is available. (I should know; I co-founded an organization in 2017 called Goods Unite Us that compiles it.)
And this data has many uses.
Knowing the politics of a company’s C-Suite can give you insights into the values of the people running the company.
If the Chief Executive Officer, Chief Financial Officer, Chief Technology Officer, and Chief Operating Officer of a particular company all contribute heavily to conservative politicians and political action committees (PACs), don’t you think it’s much less likely that they are implementing company policies to curb climate change and/or adopt fair labor practices?
In fact, the data bears this out.
My organization and CSRHub published a study in 2020 that found a statistical correlation between companies that contribute to Democrats and higher ESG scores. The Democrat-leaning companies had higher overall ESG scores across all categories analyzed. And the results were statistically significant in all but one of the four ESG categories analyzed (Governance).
Knowing a company and its senior executives’ politics could also be an indicator of future financial performance.
In a study we released in October 2021, we split the S&P 500 into two buckets based on political giving:
- a Republican group comprising companies that have contributed more to Republican politicians and PACs than to Democrats over the last three federal election cycles;
- and a Democratic group comprising the companies that have contributed more to Democrats than Republicans.
We then analyzed each group’s stock performance [between 2016 and 2020] using both an equal weighting and a market cap weighting methodology.
The results were unequivocal.
The Democratic-supporting companies significantly outperformed the Republican companies in total and in four out of the five individual years on an annualized basis, sometimes by a wide margin. The Democratic group also outperformed the entire S&P 500 over the same five-year term on a market cap basis. The Republican group did not.
Of course, past performance isn’t an indicator of future results. But the study’s findings were telling.
For a more recent data point, consider the Democratic Large-Cap Core ETF ($DEMZ), which launched on Election Day 2020 using my organization’s political contribution data. The fund only includes S&P 500 companies who, in conjunction with their senior executives, contribute 75% or more to Democratic politicians and PACs.
Since its inception over two years ago, DEMZ has slightly outperformed the S&P 500, net of fees – and was rated in the top 5% of funds in its category in 2021. The fund has also received high ESG ratings from Morningstar, even though the fund doesn’t explicitly use ESG ratings as a screen. The DEMZ fund doesn’t own oil and gas companies, for example, because there aren’t any in the S&P 500 that are Democratic. As a result, DEMZ has also received Morningstar’s highest sustainability rating (5 globes).
Regardless of whether you agree that a company’s politics can impact its ESG or financial performance, failing to consider a company’s politics when constructing an impact or ESG fund can lead to absurd results.
Take the NAACP. Its Minority Empowerment ETF seeks to provide exposure to U.S. companies with strong racial and ethnic diversity policies in place. But the ETF includes Devon Energy ($DVN)―and the politician that Devon Energy has funded the most over the last three election cycles is Oklahoma Representative Markwayne Mullin. Incredibly, Mullin did not support and stayed silent during voting on the Emmett Till Anti-Lynching Act in 2020, which made lynching a federal hate crime (it became law last year).
In fact, if you dig down and look at the companies that are included in many of the largest ESG funds (e.g., iShares ESG MSCI USA ETF (ESGU) & Vanguard FTSE Social Index Fund Admiral (VFTAX)), you’ll find many companies that have been bankrolling Republican politicians and PACs. These are the same Republican politicians and PACs who in turn are trying to undermine ESG ideals by pushing tax breaks for fossil-fuel companies and working to weaken the rights of women and minorities.
Perhaps the most notable example of a failure to incorporate political contribution data is the American Conservative Values Fund (ticker: ACVF). According to its website, ACVF allows you to “align your investments with your conservative values” and to “stop investing in the liberal agenda.”
Last we looked, however, four of the fund’s top five holdings – Microsoft, Tesla, Costco, and Nvidia – have all overwhelmingly contributed to Democratic politicians and PACs for many years.
The bottom line is this: ignoring a company’s politics ignores one of the most important ways a company can impact our society. That’s why I believe ESG should become ESG“P”, for politics.