When ESG Is a Lie

The initials E, S, and G stand for environmental, social, and governance. Taken together, ESG is an investment philosophy. Many investors put money into funds that tout companies that are said to be committed to a cleaner environment, social responsibility, and sound as well as ethical governance. To the credit of ESG principles there is some evidence that companies that govern ethically and soundly with an eye toward a clean environment and careful use of natural resources can be quite profitable. The downside of this approach to investing is that you cannot always be sure when companies are really following a true ESG approach or “greenwashing” or simply promoting themselves as green and more in order to attract investors. So, when is ESG a lie?

Goldman Sachs ESG Fund Investigation

The New York Times business section reports that Goldman Sachs is subject to an SEC investigation about its ESG funds. The SEC has set up a special unit to investigate companies and Wall Street firms that may be lying to investors about the criteria for stating they are ESG compliant. A big problem when picking ESG investments is that it takes a lot of work for a retail investor to find out the truth about each aspect of the ESG puzzle for any given company, not to mention doing the homework for several in a balanced portfolio. Thus, investors tend to give the research over to folks like Goldman Sachs who may be prone to telling “white lies” about one of more aspects of the ESG puzzle for any given company. Interestingly, some companies that are having financial difficulties use their “green” designation as an excuse!

ESG Funds Don’t Do As Well As Promised

The Harvard Business Review notes that ESG funds are less profitable than promised. The vast majority of these funds (87%) are European and the minority (13%) are American. It turns out that the funds that are rated highest in terms of sustainability attract more investors than funds that rate lowest in this category. However, the funds with the lowest sustainability ranking outperform the ones ranked on top. This is not surprising, especially in an era when the S&P energy sector is beating everything else as the market plunges.

What Is Greenwashing?

Greenwashing is a term that describes false advertising to customers and promotion for potential investors. The trick is to convey a false impression without actually lying generally when trying to convince that a company follows environmentally friendly, socially responsible, and governmentally sound practices. An example is when a company touts its use of recycled materials for packaging when, in fact, this applies to only a small portion of their product line. Or a company may tout giving scholarships to disadvantaged individuals when the scholarships are small and for limited time frames. The term dates back to the 1960s when hotels encouraged guests to reuse their towels to save the environment but really were just doing this to reduce laundry costs!

How to Invest in the ESG World

A lot of ESG investing has a negative slant. Investors did not like Apartheid so they did not invest in South Africa. People do not want to “reward” big oil companies so they invest solar panels or wind farms. They are certainly free to do this but should not complain that they are not making any money. A better approach is to find a company that is working on something you want to see succeed and is likely to succeed as well. Tesla is an example in that it is at the head of the movement to make electric vehicles and has rewarded shareholders. The point is to limit your investments to one that you can adequately investigate. To the extent that any of these companies are in the public eye and are volatile, they may be good options trading opportunities. This is another good example of where you should not trade alone but rather sign up with one of the trading squadrons at Top Gun Options.