Investing fads are nothing new. The latest fad in investing is environmental, social, and governance (ESG) funds. The purpose of these funds is to invest in "responsible" companies as a way to push for social change - particularly for the purpose of mitigating climate change - while at the same time earning market returns.
Environmental, social, and governance issues have moved from the periphery to become a focal point for investors, regulators, and other stakeholders. Kathryn Kaminsky of PwC says tax needs to be part of the ESG equation.
Companies have a lot of good reasons to pay close attention to environmental, social and governance factors: attracting talented employees who want to work at a place that is making a positive impact on the world; responding to regulators who are demanding more ESG-related transparency; and pleasing major investors who are pushing them to be sustainable for the long haul.
Deutsche Bank AG’s asset management arm, DWS Group , tells investors that environmental, social and governance concerns are at the heart of everything it does and that its ESG standards are above the industry average.
For many years, ESG-style investing has been making progress in the finance world. But now that the cseems poised to actually enforce such a framework, will corporate managers suddenly get cold feet? Will investors benefit from consistency and certainty of market-wide rules, or is a “comprehensive ESG framework” a serious threat to property rights? Can we trust financial regulators to adjudicate controversial social issues?
Last week, Exxon Mobil, one of the world’s largest publicly traded international oil and gas companies, lost a critical board fight with Engine No.1, a “woke” small investor group. The win was predictably spun by the mainstream media as a David vs. Goliath story as well as a milestone moment for a new type of altruistic Environmental, Social and Governance investor. The truth, however, is more cynical than heroic. Among other things, this is a story of how a billionaire like Larry Fink, a true Wolf of Wall Street, uses other people’s money to simultaneously camouflage his checkered past and help promote himself as an elder statesman of the markets, a beneficent oligarch with a penchant for saving the planet.
BlackRock and others bill the cost to middle-income investors, in the form of lower returns. Workers with pensions or 401(k)s trust financial institutions to make the best investments for their retirement incomes. An increasing number of portfolio managers say they maximize returns with their Environmental, Social and Corporate Governance, or ESG, investment criteria. But is that true, and is it the proper role of financial institutions?
Big claims are being made for ESG (environmental, social, and governance) investment strategies: ESG will reconcile society to capitalism while making investors—and Wall Street—more money. BlackRock, the world’s largest fund manager, is pushing ESG as part of a marketing pitch to millennials, who put “improving society” ahead of “generating profits.” Much of the buy-side pressure for ESG comes from state and municipal pension funds playing politics with taxpayers’ and pensioners’ money, many of which are in poor financial shape.
Want to align the core of your investment strategy with climate-change values? Or build a sustainable equity portfolio for the long-term by focusing on environmental, social and governance goals? A variety of ESG exchange-traded funds have made these and other promises. But as the table below shows, they mostly hold the same large capitalization technology stocks as the S&P 500 Index, represented in the top row by a popular ETF with a miniscule 0.03% expense ratio, in similar weights.
The concept known as environmental, social, and governance (ESG) theory has a long history of similar, predecessor concepts both in academic literature and in the business world. For over a century, critics of the market economy, largely inspired by progressive political goals, have argued that for-profit corporations should not limit themselves to seeking profits for their shareholders, but should engage—or be required to engage—in various sorts of activism to address social problems and concerns. This movement grew up alongside evolving expectations of social responsibility within the business community that motivated many managers and executives to provide a range of services voluntarily to employees and to their local communities.
