You’re wrong about ESG investing
Look. Everyone wants to do better. To be better. But are you actually better if you only talk about doing good - and don’t actually do anything about it? And how pissed would you be if you found out you thought you’d been “doing good” this whole time - only to find out you fell prone to a marketing scheme? And by marketing scheme, we mean ESG investing. We’re about to make a pretty radical claim, defend it well, and open up some further conversations. But more than anything, we hope it prompts action from you. Disclaimer: We understand this is a highly sensitive topic. But someone has to call it out. We’re doing this for your own good and the good that you’re trying to do. Poetic, no? Let’s continue. If you stumbled upon this article in search of how to invest in line with your values, congrats. That’s a noble goal. And we are going to tell you how to do that. But first, we need to unwind a few rumors.
What does ESG mean?
Let’s start by defining ESG and where the concept came from. Don’t skip over this section if you feel like you’re familiar already. Because we want to make sure we’re starting 100% on the same page as the argument lays itself out.ESG stands for environmental (think water conservation, clean air), social (human rights, community welfare), and governance (board gender equality, BIPOC representation). To be considered an ESG investment, a company must “prioritize financial returns alongside a company’s impact on the environment, its stakeholders, and the planet.” (Motley Fool) Right. Sounds nice.
Still feeling good? Hold on to that because we’re about to start taking our left turn.
Take a minute to think about what the methodology is behind determining where a company falls on the ESG scale. Maybe you’re not familiar. And there’s a good reason for that. It’s because there’s no generally accepted scale that determines if a company is inherently good or bad. No hard, defined, clear set of rules for what designates a company as “environmentally friendly” or “socially responsible.” Either of which would garner you an ESG-approved label right now. At this point, it’s just one of any number of groups giving the thumbs up or down like a scene out of Gladiator. Gird your loins.
What is ESG Investing?
Most simply, ESG investments are companies put through a(n arbitrary) screen to filter out the ones that don't meet the environmental, social, or governance standards of said screening process. And with that much gray area, there’s plenty of room to manipulate. Listen, Wall Street takes every opportunity to make money and this one was just too tempting for them to resist. With a shiny new toy and a marketable mission, it wasn’t long before investment firms figured out how to make money from ESG. According to the 2019 Accenture Chemicals Global Consumer Sustainability Survey, more than half of consumers surveyed would pay more for sustainable (meaning recyclable or reusable) products.
Turns out, there’s good money in going green.
Speaking of good money. With the rise of index investing, an ESG index investment makes perfect sense. So, Wall Street got to work. They created ESG indexes in every color and combination you could think of. And it worked. The public couldn’t get enough. You want to invest in companies that don't pollute the ocean? Done. You only want to invest in companies with minority representation on their board and among their leadership team? Easy. You’re into canceling carbon emissions? You’ve got it. Taking a stand against unfair labor practices? You better believe there’s an investment for that. They built it and you came. Understandably so.
ESG investing means well. Or does it?
If you’ve ever watched Wolf of Wall Street - or any Wall Street movie, really - you know that the name of the game is creating new and interesting investments to garner the attention of investors.
We’re talking junk bonds in the ‘80s, tech stock IPOs in the ‘90s, housing bubble in the ‘00s, the list keeps going.
Believe it or not, Wall Street is a giant marketing machine. The better they market, the higher the demand. The higher the demand, the higher the price of the investment. And the world spins madly on. You can probably see where this is headed by now. Like a college kid with a cafeteria tray on the first snow day of the year, we’ve just started our downhill journey with ESG investing.
Straight from the source
An anonymous source shared that one of the largest investment firms in the world (a name you would know if we dropped it) even knows what a sham ESG investing is. The exec at said investment firm admitted to running well-known ETFs through an algorithm (which costs the firm nothing, by the way), slapping an ESG label on the fund, and making 7-10x’s more money on nearly the same assortment of investments as the standard ETF.
“It’s Wall Street. We’re going to make as much money as we can.”
Yikes.
ESG investing scores: a case study
Can you think of two companies more polar opposites than Hormel Foods and Tesla? It’s fun to think about, but do that later. Because right now we’re talking about their ESG scores. Which of the two companies do you think ranks higher for social, environmental, and governance standards?
Hormel vs Tesla
On the surface, two very different companies. One processes tons of pork and poultry products every single day. The other provides power to schools in Uganda and created Cybertrucks that run 100% on electricity. While sitting on seemingly opposite sides of the conservation conversation (say that three times fast), the answer feels obvious. And yet. They’re practically the same in the eyes of ESG. Hormel Foods’ score is 28.7, “medium risk.” (At least they’re doing better than Monsanto who doesn’t even have a score.)
Tesla comes in at 30.8, tagged with “high risk,” and “significant controversy level.” We’re going to pause for a minute and give credit where credit is due here: The Tesla PR team. They should really win a Nobel prize for 1) keeping up with Elon Musk and 2) bringing solar energy and electric cars to the top of the general public’s mind. The Hormel Foundation has provided $300M in community grants, spent $11M to compensate their employees during the global pandemic, and was named one of the Human Rights Campaign's Best Places to Work. Tesla has high E, low S, and low G because Elon Musk does not let marketing get in the way of good engineering. And that’s straight from Lex Fridman.
Yet, marketing has told us that Tesla is great for the environment because their cars don’t run on gas.
ESG scoring is arbitrary
Need more proof that some of your favorite companies aren’t doing as well as you believe them to be? Nike tiptoes around unfair labor practices in China, Target and Walmart don’t comment on the rise of alleged indentured servitude, and feel free to read about what China did to H&M in the Chinese market when H&M spoke out in defense of the people of Xinjiang. Because if you claim you are into ESG, but that Vox article took you by surprise, this is your wake-up call. Sufficiently heated? Great. Us too.
Bold mission, same sh*t
The ultimate nail in the coffin. If ESG is supposed to screen out the bad guys, let’s compare the holdings of one of the most popular ETFs, the S&P 500 (notice no ESG tag) to one of the most popular ESG ETFs. Look at the insane amount of overlap between these two. We’ve highlighted the only difference in top holdings:
See that? They’re essentially the exact same. The companies behind the ESG ETFs know that you can’t abandon fundamental analysis for the feel-good flavor of the day. And to take it one step further, right off the bat you can call out two of the largest corporations in the ESG ETF -Amazon: while we all love our overnight deliveries, think about how much damage is being done to the environment between fast fashion and alleged terrible corporate governance. Johnson & Johnson: has been fined for allegedly letting people ingest talcum powder, resulting in cancer.
But now what?
By investing in an ESG ETF, you’re essentially walking away with the same thing that you’re getting in lower-cost broad-market ETFs. But with the slight addition of a buzzword. And this time, your fees have skyrocketed. That said, If you were focused on investing with a clear conscience and were okay to give up some return in the meantime - the joke is on you. Your intentions are good. We believe that to be true. But you’re missing the mark by throwing your money to a fund with an “ESG” label slapped on it. And it’s time to make a change now that you know better. There are some relatively easy ways to accomplish your original purpose of doing good. Now that we’ve laid ESG investing and all of its sh*t bare, it’s time to turn your original intention into true action.
How to give back the right way
First, stop buying catch-all investments under the guise of ESG. They’re bullsh*t. And as we’ve just seen, highly correlated with “regular” investing. In order to invest in line with your values, there is some groundwork that needs to be done first. You have to start by figuring out what it is you’re really trying to do. If you really want to do good, take your money and go do good. If you’re trying to be philanthropic, be charitable.
While investing isn’t philanthropic, investing allows you to be philanthropic.
If you want to profit, invest. Then, take that profit and use it to monetarily support whatever cause you’d like to help.
Other ways to align your money with your values
Ready to put your money where your mouth is? Let’s take those good intentions and turn them into significant action. To be really clear - all ESG initiatives are not bad. We all want a more egalitarian society, to slow climate change, and to see people treated with dignity and respect. So, we’ll leave you with a few direct ways we’ve found that may help you have the impact you so eagerly seek. (And thank you, by the way. For seeking to do the right thing.)
Invest in municipal bonds that work directly with the local community.
Use your money to buy local. You may feel good buying organic at Whole Foods, but if your lettuce was flown in from an organic farm in South America, how much jet fuel was burned to get that head to your table?
Give your money to direct lines of help. Like natural disaster relief efforts or helping families who have lost their homes. In both cases, the needs are immediate. Your money, in the hands of those seeking immediate relief, means more now than it would in the future after you’ve invested and grown what you’re bringing to the table.
Consider supporting Fair Trade Certified companies.
Learn about social capital ventures like the Acumen Fund.
We’re hoping this piece served to shed light on a commonly held misconception. We don’t like it when people who come our way feel like they’ve been duped. Not in this house. So thank you for being open-minded, stepping up, and caring enough to make a change.
