Investing your money green almost seems to become the standard among wealthy people. The so-called ESG funds have made amazing progress in recent years, which has meant that even the major investor BlackRock decided to go full ESG.
ESG stands for Environmental, social and management. In other words: factors that play a role in investing your money sustainably.
ESG score: what are the criteria?
Good, you might say. Still, there seems to be quite a bit of haggling over the ‘green’ nature of many ESG funds, write American associate professor Kenneth P. Pucker and management professor Andrew King in an opinion story at the Harvard Business Review.
The so-called ESG scores, they quote the Bloomberg news agency, “do not measure a company’s impact on the planet and society. In fact, they measure the opposite: the world’s potential impact on the company and its shareholders.”
It will therefore primarily be about shareholder interests. Not surprising, one would say, because it is also a fund with investors. They want to make money. However, the green goals seem to have snowballed as a result, which is the exact opposite of what you want to achieve as a green investor. We share the biggest problems with you.
1. ESG scores are random
There is no regulated rating behind an ESG fund. They are often based on comparable data from peers, which are often far from complete. For example, many fossil fuel companies have higher ESG scores than electric car manufacturers.
Looking at BlackRock’s 2021 US Carbon Readiness Transition fund, it appears the company is also investing money in ExxonMobil and Chevron. These parties may have slightly better ratings than some of their peers, but of course they are not sustainable. A standardized approach to ESG scores would avoid many problems, the publicists believe.
2. ESG funds operate in secondary markets
Instead of taking a new stake in companies, ESG funds prefer to operate in secondary markets. Here they buy up previously issued shares or options in companies. According to the publicists, this way of buying shares is not suitable if you want to encourage a company to succeed more.
In fact, they cite a 2013 Stanford study, “most economists agree that it is virtually impossible for a socially motivated investor to amplify a publicly traded company’s favorable returns by buying its stock.”
3. ESG investments do not always pay off
ESG funds often sell their product with the promise that an ESG investment will yield higher returns. They point out that ESG companies have better managers, attract and retain more engaged employees and realize higher margins.
Thousands of studies have been done on the returns of ESG companies, but researchers have so far failed to substantiate these claims. More than two-thirds of the studies show that there is at least a non-negative relationship between ESG and returns. A positive correlation, on the other hand, has not been demonstrated.
The publicists recently concluded in their own study that “the evidence suggests that there is little reason to conclude that [ESG-criteria]… reliably predicts stock returns’.
4. ESG funds perpetuate the market’s adventure
The increasing amount of money circulating in ESG funds can give the impression that the many trillions needed for the energy transition are on the way. It allows ESG funds to reduce the pressure on politicians to invest in green issues from the government.
In other words: market-solves-it thinking. Playing with fire to save humanity from an uninhabitable earth due to climate change requires not only private but also public monstrous investment. And definitely not greenwashing.
Criticism of ESG is not mild
Because of all the negative attention on ESG funds, criticism among investors and insiders is increasing. For example, British hedge fund manager Sir Chris Hohn recently stated: ‘ESG is total greenwashing for most managers. Investors need to wake up to realize that their asset managers are talking but not doing it.’
Research firm Morningstar removed the ESG label from more than 1,200 ESG funds with more than $1 trillion in assets because the funds do not “definitely integrate ESG values into their investment choices.”
Maybe we should stop investing in ESG, say critics. Isn’t it better to integrate non-financial ESG values into regular investment analysis? Great plan, think the publicists, but they point out that thousands of public companies in the EU are already required to report on this. The US stock watchdog SEC is also working on something similar.
Better government policy is needed
The publicists believe that a “continued shift in incentives to better align private profit and social welfare” is needed to tackle the problems. This also includes better government policy. They point to California’s policy of moving heavy transport from diesel to electric and to the Netherlands, where Schiphol is to reduce its flights by 12 percent.
Finally, we would be better off making private investments in climate technology companies, that is, groups that invent technology to reduce emissions (e.g. electric planes or CO2 filters). Plus point: From the first half of 2020 to the same period in 2021, the number of investments increased by more than 200 percent.