The Majority of ESG Funds Are Not Sustainable. Here’s Why.
Environmental, social, governance investing sounds great, but unless you go the extra mile with your due diligence, your “green” investment may not be doing all the good you had hoped.
You are now subscribed
Your newsletter sign-up was successful
Want to add more newsletters?
Delivered daily
Kiplinger Today
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more delivered daily. Smart money moves start here.
Sent five days a week
Kiplinger A Step Ahead
Get practical help to make better financial decisions in your everyday life, from spending to savings on top deals.
Delivered daily
Kiplinger Closing Bell
Get today's biggest financial and investing headlines delivered to your inbox every day the U.S. stock market is open.
Sent twice a week
Kiplinger Adviser Intel
Financial pros across the country share best practices and fresh tactics to preserve and grow your wealth.
Delivered weekly
Kiplinger Tax Tips
Trim your federal and state tax bills with practical tax-planning and tax-cutting strategies.
Sent twice a week
Kiplinger Retirement Tips
Your twice-a-week guide to planning and enjoying a financially secure and richly rewarding retirement
Sent bimonthly.
Kiplinger Adviser Angle
Insights for advisers, wealth managers and other financial professionals.
Sent twice a week
Kiplinger Investing Weekly
Your twice-a-week roundup of promising stocks, funds, companies and industries you should consider, ones you should avoid, and why.
Sent weekly for six weeks
Kiplinger Invest for Retirement
Your step-by-step six-part series on how to invest for retirement, from devising a successful strategy to exactly which investments to choose.
So, you buy an ESG mutual fund or ETF and you’re excited that you’re going to change the world with your investments. But then you get your annual report and start browsing through the holdings and realize that your ESG fund is simply less bad than your traditional index fund, and reality sets in. This isn’t what you thought it was.
This happens all the time because there is no regulation when it comes to labeling funds as “ESG” or “sustainable” or anything else in the responsible investing realm. It’s the wild, wild West, buyer beware, every red flag you can think of.
Ultimately, the disconnect happens because there isn’t a universal understanding of what ESG (environmental, social, governance) or sustainable investing is. We think that it’s all the same and we want to jump in. And the people marketing ESG funds assume that you’re not going to take the time to look under the hood to see what you really own, and they take advantage of that. But it truly does a disservice to those of us who really care about making a difference in the world and aligning our investments with our values.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Too often these ESG index funds rely on traditional indexes as a base from which to invest. The problem with this is that the traditional indexes are rooted in the old economy, and you can’t invest for the new economy by looking in the rearview mirror.
The Difference Between ESG and a Sustainable Portfolio
ESG is a way of analyzing companies based on the three metrics it’s named for. It is not the be-all, end-all of the investment research process – it’s just a piece and should be considered as one component of comprehensive investment research. However, many index-based fund managers put together portfolios using only ESG metrics and very little common sense. They eliminate the step where a person asks, “Does it make sense that ExxonMobil is in a sustainable or responsible portfolio?”
By contrast, a truly sustainable portfolio is focused on a positive, solutions-based approach. What are the companies that are going to help us adapt and be more resilient to the structural and systemic risks that we are facing? It uses ESG metrics, but also looks at a new, more sustainable economy and the opportunities it presents.
I like to look at it this way: An ESG portfolio that reduces its allocation in ExxonMobil is less bad. A portfolio that eliminates it entirely is better, but a portfolio that buys First Solar (FSLR) in its place is both sustainable and responsible.
To Be Sustainable, You Have to Go the Extra Mile
A sustainable portfolio requires forethought and analysis beyond basic fundamentals and ESG metrics. It includes understanding the new economy and which technologies, sectors and industries are going to be market leaders and changemakers. In some cases, it might be traditional industries that are rapidly adapting, or it might be a technology that didn’t exist five years ago. It could be sustainable real estate and green building technologies or the rapidly expanding world of batteries, electric vehicles and other forms of green transportation. And beyond the obvious like clean energy, opportunities exist in cutting-edge biotechnology to cure disease and help people live longer, healthier lives. A healthier society is a more sustainable society.
If your ESG fund isn’t actively looking at its holdings from a similar solutions mindset, then it isn’t sustainable.
What You Should Do as an Investor
The best way to avoid the greenwashing that is happening in the ESG investing world is to do some basic due diligence. Before you buy a fund, take a look at its holdings – if something doesn’t seem right, it probably isn’t.
Don’t just trust the label because the reality is that virtually all of the widely distributed ESG indexes aren’t sustainable. Find an investment manager who actively invests in solutions to the world’s greatest problems and avoid the ones who are simply trying to be a less bad version of traditional indexes.
-
My First $1 Million: Retired Nuclear Plant Supervisor, 68Ever wonder how someone who's made a million dollars or more did it? Kiplinger's My First $1 Million series uncovers the answers.
-
How to Position Investments to Minimize Taxes for Your HeirsTo minimize your heirs' tax burden, focus on aligning your investment account types and assets with your estate plan, and pay attention to the impact of RMDs.
-
Are You 'Too Old' to Benefit From an Annuity?Probably not, even if you're in your 70s or 80s, but it depends on your circumstances and the kind of annuity you're considering.
-
Don't Bury Your Kids in Taxes: How to Position Your Investments to Help Create More Wealth for Them
To minimize your heirs' tax burden, focus on aligning your investment account types and assets with your estate plan, and pay attention to the impact of RMDs.
-
Are You 'Too Old' to Benefit From an Annuity?
Probably not, even if you're in your 70s or 80s, but it depends on your circumstances and the kind of annuity you're considering.
-
In Your 50s and Seeing Retirement in the Distance? What You Do Now Can Make a Significant ImpactThis is the perfect time to assess whether your retirement planning is on track and determine what steps you need to take if it's not.
-
Your Retirement Isn't Set in Stone, But It Can Be a Work of ArtSetting and forgetting your retirement plan will make it hard to cope with life's challenges. Instead, consider redrawing and refining your plan as you go.
-
The Bear Market Protocol: 3 Strategies to Consider in a Down MarketThe Bear Market Protocol: 3 Strategies for a Down Market From buying the dip to strategic Roth conversions, there are several ways to use a bear market to your advantage — once you get over the fear factor.
-
For the 2% Club, the Guardrails Approach and the 4% Rule Do Not Work: Here's What Works InsteadFor retirees with a pension, traditional withdrawal rules could be too restrictive. You need a tailored income plan that is much more flexible and realistic.
-
Retiring Next Year? Now Is the Time to Start Designing What Your Retirement Will Look LikeThis is when you should be shifting your focus from growing your portfolio to designing an income and tax strategy that aligns your resources with your purpose.
-
I'm a Financial Planner: This Layered Approach for Your Retirement Money Can Help Lower Your StressTo be confident about retirement, consider building a safety net by dividing assets into distinct layers and establishing a regular review process. Here's how.
