Environmental, Social, and Governance
ESG, in the latest parlance
A way to invest to make you feel good
But does it really do what it should?
“Buyer beware” you’ve heard ad nauseam
But use special care when they are beating the drum
Why is this now the best way to invest?
I thought the old way was the best!
Some companies hide behind labels of virtue
They say “Well, it is mostly true”
Some companies do more than most
Choose those that embrace your ethos.
ESG investing is not new. I was doing it for clients in the 1990s. As with many things that have been around, when they come into vogue, they suddenly appear new. Why now?
Some reasons for this can be seen in the events of recent years. As a country we are more aware of our environment. Lately there have been upheavals dealing with social justice. Corporate governance has come under scrutiny as the make-up of boards shifts to diverse representation. Nowhere is this more evident than in California where the state dictates the diversity of corporate boards.1
Seems like an enviable, even noble idea, but as with everything, the devil is in the details. ESG was not popular when I started investing that way those many years ago. There were not a lot of mutual funds that used “screens” that met the criteria. The criteria itself was confusing. The criteria itself is still confusing. In May, TESLA was kicked out of the S&P 500’s ESG index and Exxon was kept.2
“A non-sustainable company is unsustainable.” ―Fábio Pestana Bezerra
With some digging you can find their rationale, but it takes a lot more digging to find the criteria. Since, they have reinstated Tesla. The top 20 percent holdings of the index are Amazon, Apple, Microsoft, and Tesla. This does not leave a whole lot of room for the other 272 stocks in the index. The next largest holdings are Alphabet, J&J, Meta, Berkshire Hathaway, and Exxon for another 12 percent of the index.
When compared to the non-ESG S&P 500 index you find the same top four holdings, albeit with slightly different weightings.
“Sustainability is no longer about doing less harm. It’s about doing more good.” —Jochen Zeitz, President and CEO of Harley-Davidson
Among the S&P 500’s offerings, we find S&P 500 ESG 3 percent Decrement Index, S&P 500 Equal Weight ESG Index, S&P 500 ESG Leaders Index, S&P 500 Value ESG Index, and the S&P 500 Growth ESG Index, just to name a few.
It can get confusing when there are so many choices, and where were these choices several years ago? Fund companies are like other businesses. They follow the trends. If the public wants ESG investing, the fund companies will build ESG indexes for them to invest. Investment companies are no different than other for-profit companies. They will offer what sells.
This in no way means ESG investing is not something you might want to explore. It means the different indexes and their criteria can be complex and confusing. Before you pay extra for something, you want to make sure there is commensurate value.
Give us a call and we can help you navigate this maze.
Listen: “Stock Market Rap” —Shoeless Jeff and Scott Free
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. To determine which strategies or investments may be suitable for you, consult the appropriate qualified professional prior to making a decision.
All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Socially Responsible Investing (SRI) / Environmental Social Governance (ESG) investing has certain risks based on the fact that the criteria excludes securities of certain issuers for non-financial reasons and, therefore, investors may forgo some market opportunities and the universe of investments available will be smaller.