Don’t Fall for This Hot Investing Trend

Amanda Heckman|April 23, 2022

There’s a hot investing trend on Wall Street.

It’s so popular, even the government is getting involved.

And while it sounds good in theory… in reality, it’s not much more than a ploy designed to attract your dollars.

I’m talking about ESG investing.

ESG investing takes into account a company’s behavior and policies when it comes to environmental, social and governance issues.

The trend has taken off over the past few years as the conversations about climate change and other societal issues have grown louder.

It’s gotten so big that Yahoo Finance has added a tab to its site where folks can see ESG data.

Even the SEC has joined the fray and will soon require companies to publicly disclose the environmental impacts of their businesses. (Uh oh… Manward is in trouble. Andy has declared war on a fox. Gulp.)

Like Moths to a Flame

Lured by the promise of “doing well by doing good,” investors have poured billions of dollars into ESG strategies.

By some estimates, there are now close to 1,000 ESG-related funds on the market.

Companies are hiring “ESG officers” and dropping the term in their filings, quarterly reports and investor presentations.

In all, ESG assets are set to grow to $50 trillion by 2025, per Bloomberg Intelligence.

But – as with anything that becomes a headline favorite – that’s hardly the end of the story.

To see what’s really going on… let’s go straight to the top.

In a recent survey of 1,491 executives across different industries around the world, CEOs and company leaders said that sustainability was a priority.

But 58% also copped to “greenwashing” (when a company says it’s environmentally conscious but isn’t making any effort to be so). Among leaders in the U.S., that figure rose to 68%.

And two-thirds of executives in the survey doubted whether their company’s sustainability efforts were genuine.

After all, only 36% of executives said that their companies had measurement tools in place to track their sustainability efforts.

It’s Business 101… You can’t improve it if you can’t measure it.

No Vote of Confidence

Another recent study found that executives use ESG as a scapegoat when things go wrong… but do not credit it as a cause when things go right.

A company underperforms expectations? That’s because it’s focusing on ESG efforts. Outperforms them? No public mention of ESG.

Why give credit to something you don’t even know is working?

And in a bit of tragic irony… researchers at Columbia University and the London School of Economics compared the ESG record of U.S. companies in 147 ESG fund portfolios with that of U.S. companies in 2,428 non-ESG portfolios.

They found that the companies in the ESG portfolios weren’t so good at following labor or environmental rules. And companies added to ESG portfolios did not subsequently improve compliance with labor or environmental regulations.

Yikes.

So we have CEOs saying ESG is a priority… then admitting they use the term for publicity… aren’t measuring it… and don’t follow ESG practices.

Not much of a vote of confidence that your investing dollars are doing much good, is it?

Paying a “Greenium”

Looking at some other data, it’s easy to see why the number of ESG mutual funds, index funds and exchange-traded funds (ETFs) keeps growing… and it’s not for some altruistic reason.

No, it’s quite simple… Investors in sustainable funds are paying a “greenium” relative to investors in conventional funds. Investment research firm Morningstar found a higher asset-weighted average expense ratio for ESG funds (0.61%) compared with their traditional peers (0.41%).

Investor demand for these funds is breaking records… Money held in sustainable mutual funds and ESG-focused ETFs rose globally by 53% last year to $2.7 trillion, with a net $596 billion flowing into the strategy.

Fund managers have found the golden goose and have no reason to give it up. They can keep pumping out these funds… and they’ll find plenty of investors to jump in.

Be wary of putting your hard-earned dollars into trendy investing tactics. There’s always more to the story.

As always… just follow the money.

It goes where it’s treated best.