Does your “social” investment fund really share your values?
Americans love labels. Successful buzzwords, slogans and catchphrases take off like the wind, then spin out of control in almost every direction.
This is how one company’s mission and ideal becomes another’s marketing pitch, with the consumer stuck in the middle trying to figure out the difference.
Over the years, this is precisely what has developed with “ESG investing”, the acronym for “environmental, social and governance” factors that individual investors, financial advisers and fund managers put more and more in play.
As a result, “ESG investing” is more confusing and confusing than ever. It’s not hard to find competing ESG-branded funds whose ideals and processes are as different as Democrats and Republicans, diametrically opposed thinking that is presented to the public as if pursuing the exact same mission.
This is why the Securities & Exchange Commission recently proposed to modify/improve the disclosures so that investors have a chance to determine what type of ESG funds are suitable for them.
Honestly, while I expect the SEC’s proposal to pass, I doubt it will have any real impact until consumers dig in to understand the problem.
Got my shovel here so let’s dig in the dirt around ESG now so you don’t have to wait for laws to change to make sure you get what you pay for if environmental, social and governance issues are part of your investment thinking.
What is now called ESG investing began as “socially responsible investing”, which began in the 1960s but was popularized a few decades later when investors boycotted stocks or entire industries that were considered to support apartheid in South Africa, or which were recognized as polluting, or contributed to social ills such as smoking or gambling.
At that time, however, you would find a socially responsible fund that excluded treasuries on the basis that the government was “helping the war machine”, and then a competing fund that bought treasuries “because the government supports Arts”.
With the rise of fund rating companies trying to lump together similar issues, the “socially responsible” label eventually faded because there was no standard for what it really meant, but it implied that everyone was somehow socially irresponsible.
Thus, the label was replaced by “social investment”.
The idea always involved investing with a conscience, generally avoiding investing in “actions of sin” and often avoiding bad corporate actions (oil and coal producers due to pollution, for example) by favor of “sustainable investment” in, for example, alternative energies. producers.
Fast forward to studies showing that companies that are good corporate citizens – who care about the environment and follow best accounting/management/monitoring practices – tend to do better in the long run, even if these traits are not not readily visible in the financial statements.
At this point, for many fund managers, it was less about investing in a set of values and more about looking for the factors that lead to business success.
There are still funds that attract investors with a particular agenda, based on religious beliefs, personal values and more.
But many funds marketed today as ESG are not built around a set of beliefs; they simply incorporate non-financial factors into the investment process.
Speaking on the recent Morningstar Investment Conference’s “Money Life with Chuck Jaffe” podcast, for example, Tony Tursich of the Calamos Global Sustainable Equities Fund (CGSIX) made it clear: “We are not looking to inject our values into the process. It’s about what makes a business a better business.
But because, as Tursich noted, “Everyone has their own definition of ESG,” consumers may not get exactly what they pay for.
Consider an issue like climate change, which is clearly part of the environmental part of ESG.
You can find ESG funds that believe the energy transition requires a rapid phase-out of fossil fuels and the immediate widespread adoption of cleaner energy sources like wind, solar, and nuclear. And then there are funds which believe that the energy transition makes it possible to continue to use fossil fuels, but by relying more on natural gas than on coal, and new technologies such as carbon capture to contain or reduce shows.
I’ll leave the debate to others, simply noting that the disagreement explains how several recent studies show that up to two-thirds of funds and ETFs with ESG in their name held stocks that wouldn’t have made it past traditional social screens.
This leads to accusations of “greenwashing,” where ESG might be more marketing hype than reality.
This is where the SEC comes in, categorizing certain broad ESG strategies and then demanding better disclosure.
As a result, funds focused on environmental factors will likely be required to disclose the greenhouse gas emissions associated with their holdings, and funds using proxy voting to promote their ESG strategy will be required to disclose their specific voting history to their declared mission.
In short, if a fund or ETF claims to achieve a certain ESG impact, the SEC wants proof.
Conversely, the proposal would prohibit funds from using ESG-related terms in their names if the factors do not carry additional weight in the investment process. This means that ‘integration funds’ (like Tursich’s fund in Calamos), may soon have to drop words like ‘sustainable’.
For now, however, investors are on their own, aware that ESG sounds good but often falls short.
This leaves it to value-oriented investors to check under the hood to ensure that a fund’s execution on environmental, social and governance issues meets their personal beliefs. Examine the portfolio to see if management thinks like you do about ESG, or if they just stuck the label on it to get your attention.
“There’s no standardization of ESG strategies – it can be personal values or just investment factors – and that’s what needs to change,” says Tom Lydon, vice president of VettaFi, a new data-driven research company that tracks funds and ETFs. “In the meantime, don’t just trust the label.”