ESG — environmental, social and governance — is one of the hottest trends in investing, but some investors are calling it a gimmick.
ESG is a new branch of funds created by companies like Black Rock, vanguard and loyalty invested in companies that meet certain criteria. These ideals relate, among other things, to standards for diversity, equity and inclusion, pollution and carbon emissions, and data security.
But attacks on ESGs come from everywhere. New York-based auditor Brad Lander recently sent a letter to BlackRock CEO Larry Fink, urging the company to strengthen its climate disclosures and release a plan to introduce a net-zero greenhouse gas emissions commitment across its portfolio.
Meanwhile, Republican politicians have accused BlackRock of boycotting energy stocks. On Wednesday, Louisiana announced it would withdraw $794 million from BlackRock’s funds, citing the company’s adoption of ESG investment strategies.
BlackRock did not immediately respond to a request for comment.
Hans Taparia, a professor at New York University’s Stern School of Business, said in a recent New York Times op-ed that while ESG investing can incentivize companies to be more socially and environmentally cautious, many investors mistakenly believe that their portfolios benefit the world when ESG is deployed The primary purpose of investing is to maximize shareholder returns.
Almost 90% of stocks in the S&P 500 are in an ESG fund that uses MSCI ratings.
The op-ed went on to argue that Wall Street needs stricter rating systems, especially when companies that have received high ESG scores have been criticized for their contribution to environmental or social issues.
Arne Noack, head of Systematic Investment Solutions for the Americas at DWS, told Bob Pisani on CNBC’s ETF Edge that ESG investing is “definitely not a sham.” He believes the idea behind the strategy is for companies to generate profits in a healthy and sustainable way.
“What ESG investing is, very simply put, is incorporating publicly available data into investment processes,” Noack said. “None of this is happening opaquely. All of this is happening very transparently.”
Small but controversial
Some investors like Noack have pointed out that debates about ESG investing may be getting more attention than they deserve. ESG funds account for just 6% of ETFs by count and 1.5% by ETF assets. However, grouping all ESG funds into one classification is too broad, said Todd Rosenbluth, head of research at VettaFi, in the same segment.
Large-cap ESG ETFs include the iShares ESG-aware MSCI USA ETF (ESGU), which tracks an index of companies with positive ESG characteristics. That SPDR S&P 500 ESG ETF (EFIV) keeps track of an index intended for selection S&P500 Companies that meet ESG criteria while the Xtrackers MSCI USA ESG Leaders Equity ETF (USSG) corresponds to the performance of the underlying index. And the Invesco Solar ETF (TAN) invests 90% of its total assets in an index of solar energy companies.
Noack said there is still a lot of room to improve ESG scores. That Xtrackers S&P 500 ESG ETF (SNPE), for example, does not target the 25% of the worst performing S&P 500 companies from an ESG perspective in each industry group. Excluded from this are companies that manufacture or invest in tobacco and controversial weapons.
However, some investors believe these ESG funds are driving a social agenda. Vivek Ramaswamy, Executive Chairman of Strive Asset Management, said in the same segment that his firm has countered “awakened capitalism” in part through two ETFs: the Strive US Energy ETF (DRLL) and the Strive 500 ETF (STRV). He told Pisani that companies need more diverse perspectives and should leave politics to politics.
Ramaswamy has focused on drawing attention to “green contraband,” the broader range of ETFs that are not marketed as ESG but use linked voting policies and shareholder engagement principles to engage with companies and vote their shares.
“If you’re a capital holder and you want to use your money to persuade companies to pursue environmental or social agendas, then it’s a free country and you’re certainly free to invest your money accordingly,” Ramaswamy said.
“But the problem I see is different,” he continued. “Where big money managers, including the Big Three, are using ordinary people’s money to vote for their stocks and advocate on the boardrooms of American corporations for policies that most of those capital holders didn’t want their money to advance.
ESG craftsmanship
Leading figures in the stakeholder capitalism movement have argued that because society affords benefits such as limited liability to corporations and shareholders, corporations have an obligation to consider social interests. But of late, money managers say many companies are trying to maximize long-term value instead.
Rosenbluth asserted that there are no pure sustainable companies, so “the fact that we have a few anti-ESG companies out there is ironic because there isn’t a pure ESG company of any size and scale.”
Ramaswamy said this claim is inaccurate because companies use ESG principles to vote on all their stocks, even though only 2% of the assets under management of companies like BlackRock are ESG funds.
“The crux of the problem, I think, is that not just the 2%, but the 100% thrive on this company-wide commitment that some customers demanded but others didn’t necessarily want,” Ramaswamy said.
He gave examples of rafters‘s Scope 3 emissions reduction proposal and the racial justice test Appleboth of which were backed by the majority shareholders using the capital of all the funds they managed.
“I have a problem using someone else’s money that has invested in funds with the expectation that the person voting on those stocks will only consider the financial interests and instead consider these other social factors,” he said Ramaswamy . “That’s the dexterity.”
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