Is “ESG” Investing A Scam?
🚀 What’s happening: Environmental, social, and corporate governance (ESG) investing has evolved into a massive trend over the last few years with analysts as recently as just a couple years ago predicting that it could be a $50 trillion dollar market one day.
While no one knows for certain exactly when this movement originated (some investors as early as the 1960s started focusing funds outside of things like fossil fuels… which would technically be ESG investing today) the ESG movement as we know it started to really gain steam in the early 2000s at the United Nations.
The original idea was that companies that focused on creating a stable environment and world would, in turn, lead to a better and more prosperous economy.
Thus the term “ESG” took off with an noble (albeit somewhat naive) cause to have companies try to do better for the environment, society, and people everywhere.
where did it go wrong?
While the above sounds somewhat innocent and these are terms on it’s face that most people probably agree with, the movement was twisted and co-opted by influential bodies and financial entities over time.
The reason this happened starts with the vague terms themselves. Terms that we all probably would agree with (who doesn’t want a cleaner environment?) actually started to get put into practice with influential bodies coming up with their own agenda and standards for what they mean. For example, today there are more than 600 agencies that will issue their own different ratings concerning the ESG score of the same company.
Each of these agencies will have their own agenda or criteria for what these terms actually mean in practice, causing headaches, confusion and the real opportunity for people to really push their hidden agendas (i.e. what they really want companies to do) under the banner of “ESG”.
There is probably no better example of this today than a situation where tobacco companies (you know, the guys actually killing people with their product) have a higher ESG score than Tesla (who makes electric vehicles). There are countless cases today like this that make little sense to the everyday observer.
tHE awakening.
More and more everyday investors and the public started to see through some of this, and the weaponization of a once noble intention started to become clearer. Loud voices and leading investors started to pipe up with several even calling the entire ESG movement a scam.
The other big downfall for the ESG movement? The bottom line for investors just wasn’t there. Brokers charged higher fees to invest in some of these ESG focused products, returns lagged companies that focused solely on maximizing profits for shareholders, and over time it became harder and harder for CEOs of these companies to justify focusing on criteria that remained all over the place.
As a result, we are left with an industry today that just saw investors pull $2.5 billion of money from the field last quarter (the first time in history more funds have flown out of this field) and what we expect will be a continued weakening of the ESG movement.
It’s hard to say what’s next for this movement, but our guess is the pendulum continues to swing back the other way as we see companies now outright avoiding the term when speaking with investors or discussing company goals.
We do expect that governing bodies will still try to corral and force their will on private companies in other ways (several sustainability and climate disclosure rules for every company to go into effect worldwide soon), but it appears that the ESG movement in it’s current form is now dead.
👪 Closer to home: For any family that has investments or retirement accounts, the moral of the story here is to really just pay attention to what you are invested in.
Whether you believe in the ESG movement or not, knowing what you own in your accounts, what kind of fees you are paying and why, and even how the broker who holds your accounts is publicly talking about these issues is important (a lot of times unless you call up your broker and specifically ask for your share voting rights, big firms will vote the shares you own, called proxy voting, to sway company action as they see fit - more on how that works here).
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