The Real Issue with ESG Investing
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Many investors come to advisors looking to align their investments with their personal goals. Advisors often point them in the direction of environmental, social and governance (ESG) investing to align the seemingly dichotomous principles of “making money” and “doing good.”
But doing good is an individually determined value and impossible to define in a blanket statement.
ESG proponents sell the idea to investors that they can achieve both altruism and high returns. In the end, they fail at both, with for example Blackrock’s ESG flagship fund ESGU down 20% in 2022 and including holdings that did not fall into the ESG bucket like AAPL, AMZN, GOOG, KO, XOM to name a few.
However, large ESG funds don’t capture individual preferences. Buying so-called ESG funds and entrusting good returns will follow and objectives are fulfilled has been a fool’s errand. The harder, more precise way is for advisors to help their clients select specific investments that match their personalized definitions of doing good.
Instead, in an effort to offer universally good stocks in a basket of securities, ESG proponents have created a one-size-fits-all product for investors, herding them into the same stocks under the guise of delivering on ESG objectives when the funds offer lower returns.
Four of the top five stocks in the SPY, QQQ, and ESGU are the exact same: AAPL, MSFT, AMZN, GOOGL. Notably, in 2022 SPY was down 18.14%, QQQ was down 32.49% and ESGU was down 20.22%. Similarly, the S&P 500 was down 19.4% and the Nasdaq 100 down 33.1%. Because the research and rating agencies behind ESG have been inconsistent and conflicted, non-ESG investments have ended up in ESG funds. A team of researchers at MIT called ESG “aggregate confusion.”