Alex Edmans: Growing the Pie: A Different Take on ESG (EP.192)

Mar 17, 2022

Join Alex Edmans, a finance professor at the London Business School, as he challenges conventional views on ESG and investor responsibility. He introduces the concept of 'growing the pie,' emphasizing that social change should drive value creation. Alex critiques the quantitative measures of ESG, advocating for a deeper, qualitative understanding of corporate contributions. Highlighting the role of employee satisfaction and corporate culture, he shares how empowered individuals can significantly enhance organizational value. Prepare for a thought-provoking dive into responsible investing and its implications!

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INSIGHT

Friedman's Nuance and Edmans' Disagreement

Milton Friedman argued that focusing on long-term profits inherently benefits society.
Edmans disagrees, citing externalities and the difficulty of quantifying intangible investments like parental leave.

INSIGHT

Divestment's Limitations and Tilting's Potential

Divestment is not a consumer boycott; selling shares requires a buyer, so capital isn't necessarily deprived.
"Tilting", where investors favor best-in-class companies within a sector, incentivizes positive change.

ANECDOTE

Honest ESG Assessment

Edmans' firm, Royal London Asset Management, avoids overclaiming impact in ESG investing.
They focus on targeted engagement and honest assessment of achievements, unlike some funds that over-market.

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We always appreciate research-based arguments here at the Rational Reminder and when those arguments might rattle some assumptions we get particularly excited. Today we have an eye-opening conversation with finance professor Alex Edmans, in which he discusses his idea of growing the pie and how social change and value relate to investor decisions. Alex's work is deeply rooted in skepticism and a critical method of assessing evidence, an approach that has resulted in surprising and sometimes paradoxical findings. We get into a fascinating conversation dealing with employee satisfaction and ESG, with Alex challenging some commonly held beliefs around socially responsible investing, with the data to back it up. A strong theme that emerged during our chat is the need for these conversations to be grounded in research, instead of empty rhetoric, and Alex's data-rich perspective is a great inspiration. Towards the end of the episode, Alex talks about the practical, individual application of his ideas, and how an empowered employee can add value on any level. So, to hear all this and a whole lot more unmissable insight, join us on the show.

Key Points From This Episode:

Unpacking what Alex means by 'growing the pie' and differentiating this from other similar-sounding goals. [0:02:38]
How to go about measuring the growth of the pie, and the pieces that cannot be measured. [0:05:14]
Alex addresses Milton Friedman's famous quote about responsibility and profits. [0:06:48]
The role of big asset managers in directing investment towards more socially responsible causes. [0:08:56]
Thoughts on the value of divestment as a means to effect social change. [0:11:34]
How much impact are typical ESG funds having currently? [0:15:05]
The subjective discussion around sustainability and Alex's definition of what makes a company sustainable. [0:17:06]
The inconvenient truth about sustainable funds' performance against the market. [0:20:56]
Alex's research into the relationship between stock returns and employee satisfaction. [0:22:23]
How to take a quantitative approach to employee satisfaction as an investor. [0:29:16]
The practical application of information about happy workplaces for investors. [0:32:51]
Alex's input on the problems associated with executive pay. [0:35:18]
Counter-arguments to some of Alex's unpopular opinions and positions. [0:39:52]
Tackling the tricky subject of board diversity at organizations. [0:41:27]
Finding trustworthy evidence in the contemporary climate and combatting the post-truth era. [0:46:22]
Using Alex's idea of growing the pie in everyday life; making the world better on an individual level. [0:48:46]
The left-field study that Alex conducted linking Spotify playlists to stock performance. [0:52:16]
Alex's perspective on his role as a finance professor and his purpose with regard to knowledge. [0:56:38]
How Alex looks at success in his life and his goal of positively impacting people. [1:00:12]