Is ESG a form of Greenwashing?

The stocks owned by some socially responsible mutual funds and ETFs are strangely out-of-place

Sustainability, responsible, and impact investing (SRI) has historically been dominated by mutual fund companies that align their investment strategies with their values (SRI). Many companies, such as Calvert, Domini, Parnassus, and Pax World, have invested responsibly to make the world a better place. In most cases, their investment managers built portfolios by understanding the companies and industries they invested in and their environmental impact.

Over the last decade, SRI investing strategies have increased in popularity. The 2020 US SIF notes an increase of 42% for investors considering environmental, social, and governance factors across $17 trillion of professionally managed assets.

However, this increased popularity led to more prominent firms looking for easier ways to adopt SRI, and more significant firms sought more accessible ways to join. New, low-cost, index-focused investment landscapes could have played better with legacy firms’ time-consuming research. ESG (Environmental, Social, Governance) research measures sustainable, responsible, and impact investing. Companies are often rated by their peers based on their ESG performance. If fossil fuel companies are more accountable than their less-responsible peers, they could score highly.

ESG + greenwashing

Companies can easily game ESG ratings when they use them. As an example, let’s look at a fossil fuel company. As a result, it boosts its social and governance scores to compensate for its low environmental score. The company may increase its charitable donations to improve the “G” score. Deception is the result of these moves – they’re not responsible. You should monitor your holdings to build a sustainable portfolio based on ESG ratings.

In the absence of human oversight, ESG portfolios are usually just watered-down versions of their underlying benchmarks. William McDonough, co-author of the book “Cradle to Cradle,” says, “Being less bad is still bad.” These portfolios are just less harmful, he says. There is no such thing as sustainable, responsible, or impact investing in ESG investing.

There may be a question asked by investors and advisors: what’s wrong with using less harmful funds? If there were no alternatives, there is nothing wrong with it. These insufficient funds can be dangerous for investors who believe they are investing responsibly. This is greenwashing when they are marketed as “best in class,” “sustainable,” or “low carbon.”

Greenwashing refers to presenting false information or impressions about how a company’s products are eco-friendly. The new ESG index funds are greenwashed when you look under the hood and examine their holdings.

If you’re more interested in achieving financial gains instead of perpetuating underperforming woke strategies, call Rubin Wealth Advisors to speak to a professional with the same moral values as you.