The truth about ESG investing

Hey Smartypants,

If you want to ethically invest your retirement into socially responsible, environmentally friendly companies, and have been eyeing ESGs, read this first.

Or watch the video here which says the same thing:


I’m willing to bet you’ve done some digging, you’ve probably heard a lot about ESG investing. ESG investing promises that you can make GREATER returns while solving the biggest problems in our society like social and environmental issues.


Quite the silver bullet - but is it?


I’ve done some digging on Wall Street Journal, Vox, and CNBC and found there’s a lot of evidence to show that ESG investing isn’t the silver bullet a lot of people want it to be, it costs you a lot more, and there’s emerging evidence it even takes away from real change.

 
 


First, let’s define what I mean when I say ESG - 

That’s the first problem. There is no one definition.

You’ll often see index (both stock and bond funds) labeled as ESG. It stands for Environmental Social and Governance

Environmental - low or no pollution, use renewables, buy offests, etc.

Social - good labor standards, working towards gender/racial equality, treat customers well, etc.

Governance - no bloated CEO packages, board is made of more than white dudes, support whistle-blowers, etc.

When funds are labeled “ESG”, this is generally meant to convey that companies that are in these investment products are good in one, two, or all three of these categories. But there is no definition. No set of rules that companies have to follow to get labeled as such.


What the consumer is told is that ESG funds funnel money towards “ethical” companies and away from “bad” companies.

But without a definition, who’s to say what an “ethical” company is and what a “bad” company is? Anyone, that’s who. Anyone can claim their fund is ESG.


Emily Stewart in Vox wrote, “Plenty of people would be surprised to learn the fossil fuel-free fund they’ve got their 401(k) in isn’t so fossil fuel-free, or that the company providing them the fund — such as BlackRock, State Street, and Vanguard — may happily vote for bloated CEO pay packages and against disclosures on items such as diversity and climate.” 

Even though there isn’t a technical definition of ESG, there are LOTS of investors who want to put their money towards good causes, myself included, and they’re willing to pay more for this. Thus, often, funds labeled ESG cost more than your average fund. They’re being greenwashed or wokewashed or acid washed jeans, whatever you want to call it, it’s often a marketing ploy.

And costs are crucial to your comfort in retirement! An analysis by the Government Accountability Office (p 7, full report found: https://www.gao.gov/products/gao-07-21) found that even a 1% increase in fees can take a huge chunk out of your retirement.

Let me give you two scenarios, in both, you invest $20k at age 45 and get a 7% return. The only difference is, in one scenario, you pay .5% in fees, in the other you pay 1.5%. In 20 years you’d have just over 70k paying .5%. Paying 1.5%? You have just over $58k! That’s a 17% difference!

This is why companies are so keen on pushing ESG products, they can make a lot more money from you because you, and I, are so desperate to make positive change, to make our money do good, we’re willing to pay extra.

There is an argument that ESG funds make more money than non-ESG funds so it’s worth the extra expense, but James Macintosh argued in the Wall Street Journal that, the only real money to be made is by venture capital when a company goes public. He also argues that ESGs are in a bubble and if you don’t get out early, you could lose big. (links in description)

The extra bad 

What people are hoping for when they buy into ESGs is to give money to good companies and keep money away from bad companies in the hopes that good companies will do better and bad companies will change their ways.

But…the impact of divestment campaigns, which is what it’s called when there’s a mass movement to get rid of stocks and bonds held by “bad” companies, is debatable. 

In fact, what they do is remove people who are against bad actions from having a voice in the company. When you own stock, you are, technically, an owner of the company. As an owner, if you don’t like what they’re doing, you can say so and they’ll listen. The more shares you own, the more of a say you have. 

Elon Musk just bought something like 7% of Twitter, which is ginormous. If he tells Twitter he wants an edit button, you bet they’re gonna finally put in an edit button.

When you sell your stock, they don’t have to listen to you. Divestment campaigns do garner a lot of attention and bad pr, which is good to help get companies to change their ways but again, their real effect is debatable.

So how can you invest ethically?

Before you invest in a fund, check its report card on As You Sow to see how it rates.

You can also look at how the company managing your retirement fund voted in proxy votes. For example, Vanguard makes it very easy to find proxy votes here: https://vds.issgovernance.com/vds/#/MjAxMA==/

OR you can hire a financial advisor to do the research for you.

Beyond that, you can vote your proxy for the companies you’re invested in.

I recommend reading the Vox article which has a more thorough run down of how to invest ethically, because it takes work, but it can be done. 

If you don’t feel like doing the work, and I can’t blame you, who isn’t busy as hell, you can invest as you would, make great returns, and attend a climate meeting once a month or donate to charities or write your representative. Unfortunately, money talks, and the more you have, the more people will listen to you. 

Which is why I want to get money in the hands of good people!

Thanks for reading!

Cheers!

Kate

Kate Moody