The Importance of the Long Term for the ESG-Conscious Investor

Theme and Background

This chapter discusses how the Russia-Ukraine conflict has completely overturned market ESG evaluation standards for defense and oil companies within a month. The report points out that these industries were previously widely regarded as "socially unacceptable" investment targets, but geopolitical crises have rapidly changed capital access rules, exposing the binary classification flaws of ESG under a short-term perspective.

Core Argument

The author's core argument is that ESG investors should not adopt a "good/bad" binary classification and simple divestment strategy, but should instead balance corporate social trade-offs through a long-term perspective. The counterintuitive judgment is: when oil company prices can compensate for the conflicting factors of environmental costs and declining demand, even ESG investors should be willing to invest.

Key Arguments and Data

• Time Comparison: One month ago, Morningstar Sustainalytics rated the most responsible defense and oil companies as having "above average" ESG risk; one month later, Swedish bank SEB lifted its ESG ban on defense stocks, Citigroup advocated including defense companies in ESG mandates, and the EU is expected to classify defense companies as socially desirable enterprises.
• Industry Characteristics: Defense products can be used for both good and evil, and oil will remain crucial to society for years to come, but the output of these two businesses cannot be quickly adjusted based on investor views—developing and manufacturing advanced weapons systems takes years, and replacing Russian energy exports takes even longer.
• Investment Logic: The author believes that divestment is a "blunt instrument" that can have serious consequences. Long-term value investors should recognize that environmental costs will ultimately reduce oil demand and incorporate this conflicting factor into the pricing of current oil and gas investments.

Companies/Assets Involved

Company/Asset	Role and Key Data	Bullish/Bearish
ConocoPhillips	Plans a low-oil-intensity future, with production in low-emission regions (e.g., U.S. shale oil fields)	Bullish (Oakmark Fund holds 2.7%)
EOG Resources	Also plans a low-oil-intensity future, with production in low-emission regions	Bullish (Oakmark Fund holds 3.6%, Oakmark Select Fund holds 4.1%)
Citigroup	Advocates including defense companies in ESG mandates	Neutral (Oakmark Fund holds 2.4%, other funds have varying holdings)
SEB	Lifts ESG ban on defense stocks	Neutral (no holdings)

Investment Implications

Investors should abandon short-term ESG labeling thinking and shift to a long-term value investment framework. The specific direction is: in the oil industry, prioritize companies that plan a low-oil-intensity future and have production in low-emission regions (e.g., U.S. shale oil fields), such as ConocoPhillips and EOG Resources, and pre-incorporate the long-term suppression of demand by environmental costs into valuations.

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Theme and Background

This section constitutes the standard risk disclosure and legal disclaimer for the Oakmark Global Select Fund and the Oakmark Equity and Income Fund. The content does not involve any investment analysis or market views but provides standardized explanations of the inherent risks associated with the funds' investment strategies (e.g., non-diversification, medium- and low-rated bonds, value stocks, foreign securities).

Core Views

This section contains no core investment views. All content consists of compliance-oriented risk reminders, emphasizing the specific risks the funds may face (e.g., volatility, credit risk, liquidity risk) and the limitations of investing in value stocks, foreign securities, and sustainable investment strategies.

Key Arguments and Data

This section contains no analytical data or arguments. It merely lists the following risk factors:

• Non-diversified funds: A single holding has a greater impact on total returns, potentially increasing volatility.
• Medium- and low-rated bonds: Offer higher yield potential but carry greater credit risk and price volatility; economic downturns may severely disrupt the market.
• Mid-cap company stocks: Typically exhibit higher volatility than large-cap stocks and may underperform small-cap or large-cap stocks in certain periods.
• Foreign securities: Include currency fluctuations, regulatory differences, transaction costs, and political risks.
• Value stocks: May fall out of favor periodically, underperforming growth stocks.
• Sustainable investing: The investment universe is limited, potentially missing certain market trends and negatively impacting overall performance.

Companies/Assets Involved

None. This section only mentions the fund names (Oakmark Global Select Fund, Oakmark Equity and Income Fund) and investment strategy categories (e.g., value stocks, foreign securities, medium- and low-rated bonds), without referring to any specific companies or assets.

Investment Implications

This section provides no investment implications. Its sole purpose is to inform investors of the aforementioned risks and emphasize that the investment strategies may not be suitable for all market conditions or investors. Investors should assess their own long-term investment capacity, especially during market downturns.