[ Forbes ] Is ESG Really A Sham?

The New York Times recently published an essay by Hans Taparia titled, ‘One of the Hottest Trends in the World of Investing Is a Sham.’ While Mr. Taparia paints a broad picture of widespread greenwashing (and I guess social washing and governance washing), he fails to look beyond the marketing engines of the big Wall Street firms to see the smaller ones that actually are working for positive change.

One of the first things Mr. Taparia references is BlackRock founder and CEO Larry Fink’s 2018 public letter. But anyone who has been in the SRI (sustainable, responsible and impact) investing space will look at an article that starts out quoting Mr. Fink as suspect. His rhetoric in his widely read annual letters on ESG certainly doesn’t translate into the holdings of the firm’s multi-billion dollar ETFs including their “ESG Aware” fund, which owns companies such as ExxonMobil, Raytheon, McDonald’s, and Meta. Mr. Fink does not represent the rest of the SRI industry.

Taparia also claims that this is “…a new industry of funds created by BlackRock and peers such as Vanguard and Fidelity…” There are many firms in the SRI industry that have been focused on responsible investing long before BlackRock began its campaign, including Calvert, Domini, Green Century, Parnassus, and Pax World. Unfortunately, the power of BlackRock’s marketing engine has overwhelmed the decades of good work that these firms have accomplished.

There’s no doubt that many of the ESG funds that retail investors expect to be green are far from that. Mr. Taparia’s examples of corporate greenwashing and criticism of ESG ratings are spot on. A big part of the problem is that institutional investors are so focused on indexing and keeping tracking error low, that they have no choice but to include the Coca-Colas and Metas of the world. These institutional preferences then bleed on down to retail funds that are, as I call them, less bad. But we deserve better than less bad.

There is a disconnect between what institutional investment entities like BlackRock create for retail investors and what retail investors actually want. Institutions are hyper-focused on indexing and creating portfolios that track well to those indexes, but investors don’t care about indexes. They actually want solutions-based, positive-impact portfolios — not a less-bad version of an arbitrary index. For example, an ESG index that reduces its exposure to ExxonMobil is less bad. A portfolio that eliminates it entirely is better. But a portfolio that replaces it with First Solar is actually sustainable – and the kind of investment that retail investors want.

ESG indexes typically have a very small to no allocation in solutions-based companies such as clean energy, green transportation, sustainable real estate, battery technology, and green building. This is where our definition of sustainable investing diverges from Wall Street’s favorite new acronym, ESG. Many of the big firms equate the two, but they are markedly different.

Ultimately, Mr. Taparia’s piece is spot on if you only look at the big, highly marketed institutional fund managers that are selling these greenwashed, less-bad indexes. But retail investors need to understand the difference between ESG investing and sustainable investing, and the only way to do that is by looking under the hood and seeing what companies they actually own.

Originally published in Forbes.

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