Chart Of The Week: ESG Funds Are Popular – But Misleading

Chart Of The Week: ESG Funds Are Popular – But Misleading

over 4 years ago2 mins

Investors have put a record $13.5 billion into environmental, social, and governance (ESG) funds this year – more than double last year’s figure.

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What does this mean?

ESG funds, which claim to take into account ethical factors when they decide what companies to invest in, have grown in popularity in recent years. But this is the year they’ve really boomed (call it the Greta Thunberg effect), and it’s been a boon for companies that are more ethical than their rivals.

It’s part of a broader change happening to capitalism – one where consumers, businesses, and investors focus on more than just money. In August, the leading organization of CEOs went as far as to declare that shareholders were no longer their sole focus: they’d start to consider other “stakeholders” like local communities.

But investors haven’t actually had to sacrifice returns on their climb to the moral high ground. According to research, top ESG funds are outperforming their peers. So investors get to feel good and make money – it’s a no-brainer… right?

Why should I care?

Dig a little deeper, and you’ll see all isn’t as it seems. A new report from the Wall Street Journal found that eight of the top ten ESG funds, for example, are invested in oil and gas companies – not exactly something you’d expect from an “environmental” fund. And one fund focused on improving gender diversity has previously voted against measures that would encourage that very thing.

The problem is that there’s not much oversight of ESG funds. That’s because there’s no single definition of what qualifies as ESG, and no one to make sure the funds are doing what they claim to be doing. And because these funds are designed to track the wider stock market, they’re invested in every industry – even fossil fuels.

That’s not necessarily a problem for institutional investors. They’re well aware their ESG holdings probably include hypocritical firms: they just don’t care, because they’re more concerned with their investments delivering market returns. But it might be a problem for retail investors like you. You shouldn’t take “ESG” at face value: you need to dig into the funds’ actual holdings to see if its values align with your own. Only then can you invest with a clean conscience 😇

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