Thematic Investing Trend: The Explosion of ESG Investing

They “Do the Right Things”, But Are These Expensive Funds Really Doing Good for Investors?

Let me ask you this. Are you interested in ESG - environmental social governance? Well, let me ask you the question a little more specifically. Are you interested in investing in a way that your investments reflect your values? Oh, now you get a sense of ESG. In other words, a lot of folks don't like tobacco, they don't like gambling, you don't like nuclear weapons. So this is a way for people to invest their money in a manner that is consistent with their values. And Wall Street has really exploded in the availability of exchange traded funds that purport to tell you whether companies are scoring high on measurements of ESG. ESG is now a really big theme on Wall Street.

Morningstar says that ETFs and mutual funds that are ESG-focused are now managing $3 trillion in assets. But here's the problem. As companies try to score well on ESG, the question becomes score well by who? I mean who decides? So now there's a new study that has taken a look at six different ESG ratings agencies, and they found that they used a variety of metrics, 709 different metrics across 64 categories.

I mean, how can anybody decide if any of this is making any sense at all? In fact, of this entire broad array, only 10 categories were found within all six of these ratings companies. So you really have to wonder who's deciding what counts and what doesn't.

Let me just give you two examples of how silly this is. One company issued a 200-page report showing how strong its scores on ESG. Do you know who the company is? Altria, a tobacco company. How could they do this? Well, they showed that they are doing very well with corporate governance. They have a diverse employee base, and they don't discriminate in wages and salaries based on sex or gender. So they score themselves really well on ESG. Go figure.

Or how about this example? Standard and Poor's, S&P, has an ESG version of the S&P 500 and they just kicked Tesla out, but they kept in ExxonMobil. Well, Tesla makes electric cars. That's like good for the planet, isn't it? But ExxonMobil burns fossil fuels. So how could they throw Tesla out but keep ExxonMobil in? It just demonstrates that the way these companies are describing themselves and how the ratings agencies are evaluating them sometimes leaves you scratching your head.

Oh, and by the way, if you are really thinking about investing in an ESG fund so that you feel better about your investments, a study by the London School of Economics and Columbia Business School found that ESG funds cost 50% more than other mutual funds and ETFs from 2010 to 2018. The companies that are offering ESG funds actually violated labor laws more, paid fines more, had higher carbon emissions more than the companies that weren't in the ESG funds. So before you decide to invest in an ESG fund, maybe you should invest in those tobacco companies and donate the profits to the American Lung Association.