Any time Wall Streets touts virtuous investing over mere investment returns, put your hand on your wallet and leave the room. From Lance Roberts at realinvestmentadvice.com:
Wall Street is once again in the midst of a “money heist” from naive investors. This time in the form of “woke activism” called ESG.
ESG refers to the Environmental, Social, and Governance risk theoretically embedded in a business. However, while ESG investing is about taking these risks into account in investment decisions, these are all the things NOT on a company’s balance sheet or earnings statements. Such is the inherent problem.
However, as is also the case, with the recent surge in liberal policies, woke activism, and demand for social justice, Wall Street is more than willing to sell products to fill a need. Not surprisingly, with plenty of media coverage, ESG investing has become an enormous business.
Following the financial crisis, ESG funds had roughly a ZERO market share of total assets under management. Today, ESG-labelled funds in the United States exceed $16 trillion.
The question is whether investors are getting what they are paying for?
What Are You Paying For
In the late ’90s, there was a significant movement by Wall Street to limit investing in “sin” stocks such as gambling, tobacco, etc. Just as it was then, investors initially jumped on board, but when returns failed to match the S&P index, that “fad” died away.
The same occurs today as investors who want to be “woke” are demanding products that make them feel good to purchase. However, there are many problems with ESG outside the labeling.
There are currently no universal rules to analyze ESG risks. Nor are there any clear frameworks to police ESG-labelled investment products. As Eco-Business recently noted:
“For example, deforestation is a major driver of climate change. You would think it’s being used as a filter to ensure companies in ESG-labelled funds are not turning a blind eye to deforestation, but you would be wrong. Carbon Tracker, an industry ‘think tank,’ found that 78% of mutual fund providers offered ESG investments. However, none specifically excluded deforestation risk. Not a single one actively priced climate risk either.”