The No. 1 Scam You Probably Got Suckered Into
And why you need to question advisors who promote it
Ric Edelman: It's Wednesday, April 12th. Today, we're going to talk about scams. And one scam in particular, is the biggest scam in investing today: ESG. It's a good sales pitch. Align your investments with your values. Do well by doing good. Focus on the environment, social and governance issues. So don't invest in tobacco or casinos or gun manufacturers. Invest instead in companies that improve the environment, advance social equality, and treat employees fairly.
ESG: environmental, social, governance. This movement has gotten a lot of attention, and the mutual fund and ETF industry is exploiting this. There are now more than 1,100 funds that claim to invest only in companies that focus on ESG. And in fact, MSCI now ranks mutual funds and ETFs based on their attention to ESG. And it has given 1,120 funds a Triple-A ESG rating.
If you buy a mutual fund or ETF with a Triple-A ESG rating from MSCI, you have the confidence that you're aligning your investments with your values. Has some financial advisor pitched an ESG fund to you? Have you invested in an ESG fund because you like the idea of aligning your investments with your values?
Well, you've been bamboozled. Two new research efforts show that you might want to rethink your strategy. One study shows that over the last one-, three-, five- and 10-year time periods, ESG funds underperformed in the overall market. Are you willing to earn less to feel good? Well, maybe you are. Sure. Earn a little less if it means saving the planet. Okay, I get that. But earn so much less that you'll run out of money in retirement?
Do you realize that you might be doing so much good that you'll be self-sacrificing your entire financial future? Take a closer look at your ESG funds’ performance record. Maybe it's okay. Maybe it isn't. All I'm asking is please make sure you really want to stake your financial future on this. And if you confirm that your ESG funds’ performance has been okay, that's probably because the fund has not actually been acting like an ESG fund.
MSCI has now decided that it hasn't been doing a very good job with its ESG ratings. And so it's revising how it evaluates all those ESG funds. And according to a recent leak of their new research, which hasn't yet been publicly disclosed, those 1,100 funds that have a Triple-A ESG rating -there are going to be just 54 of them that actually keep that rating. All the others, MSCI is going to be announcing are not actually investing in accordance with ESG goals.
So you're about to discover that the ESG fund that some advisor sold you isn't ESG at all. And even if your fund does manage to be a true ESG fund, how do you know that its definition of being socially responsible is the same as your definition of socially responsible? Say a company has a great program of hiring and promoting minorities, pays women the same as men, has lots of women in senior management, and gives all employees six months of parental leave when they have or adopt a baby. Sounds like a great ESG company, right? But what if that company operates casinos? Uh oh.
Or how about this company? They have an entire website devoted to their ESG focus for environment. They talk about renewable energy, their use of recycled, composted, reused, and recovered waste. For social, they highlight their statistics about community involvement, inclusion and diversity demographics and how many people they've hired who are women, black men and women, Hispanic men and women, AAPI men and women, American Indian, Alaskan men and women, members of the LGBTQ community, people with disabilities and veterans, those who are under 30 and over 50. They talk about their gender pay equity, their health and safety, emphasis in the workplace, their parental leave policy, all their staff training and development, their monitoring of child labor and forced labor by overseas companies they contract with.
And in governance, the company cites great statistics about how many members of their board and senior execs are female, African American, Hispanic or Latino, Asian, Middle Eastern or LGBTQ. They also show how they pay attention to the compensation of their CEO versus the rest of the company. All their statistics show that this is one great company. It scores excellent on E, S and G. There's only one problem. The company I'm talking about is Altria, the second largest tobacco and cigarette company in the world.
So if you haven't decided what ESG means to you, you could be investing in companies that don't align with your values even without you realizing it. And let me tell you why. You don't have to invest with an ESG lens in the first place. ESG is smart business. If you're a manufacturer, you need to safeguard your factory emissions.
If you pollute local streams, you're going to get fined. The publicity is going to drive customers away. Your business will collapse. So we don't need a save the planet mantra in the boardroom. We need a board mantra that says save our company because saving your company means you're going to operate in a manner that is environmentally safe. ESG is just common sense. And so in a few years, every company will be operating under ESG. And with everybody operating that way, it will no longer be a market differentiator. You're not going to be able to brag about it. Therefore, you're going to need some other criteria for the investments you buy. And if you're a financial advisor, you're going to need some new shtick to present to your clients. So just ignore ESG and ESG ratings and ignore any financial advisor who promotes them.
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