What is bad about ESG investing?
Like many economic factors, ESG factors exhibit diminishing returns, and trade-offs exist. Some ESG factors, such as employee satisfaction, have diminishing returns to scale but linear costs. Other ESG factors have hump shape relationships and ultimately negative returns.
However, there are also some cons to ESG investing. First, ESG funds may carry higher-than-average expense ratios. This is because ESG investing requires more research and due diligence, which can be costly. Second, ESG investing can be subjective.
Critics argue fund managers are prioritizing political goals over generating returns. A number of states have enacted restrictions limiting how state pension funds can incorporate ESG factors into investments.
- Environmental. Conservation of the natural world. - Climate change and carbon emissions. - Air and water pollution. ...
- Social. Consideration of people & relationships. - Customer satisfaction. - Data protection and privacy. ...
- Governance. Standards for running a company. - Board composition. - Audit committee structure.
The researchers' findings indicate that when companies focus on nonmaterial ESG factors in their quarterly financial updates, investors interpret it as a negative sign, signaling potential issues like higher costs, inefficient resource use, and distracted management.
ESG Risks are those arising from Environmental, Social and Governance factors that a company must address and manage. These risks are a combination of threats and opportunities that can have a significant impact on an organisation's reputation and financial performance.
Over the past decade or so, ESG edicts became embedded into corporate America's ecosystem as big shareholders —BlackRock, but also places like Vanguard and Fidelity — and the shareholder advisory firms like ISS and Glass Lewis increasingly voted in favor of these mandates that pushed companies to reduce their carbon ...
In December 2022, Florida announced that it was taking $2 billion out of the management of BlackRock, the world's largest asset manager (and biggest lightning rod for ESG criticism). This was the largest such divestment thus far. These attacks have been coordinated.
With accusations of “greenhushing,” “greenwashing,” and “woke capitalism,” the three letters “ESG” have become synonymous with backlash. The rhetoric is simple if one wishes to undermine economic decisions that encourage ethical behavior as a primary concern.
The backlash against ESG investing and climate-focused regulations has increasingly spread to Europe, once a leader in ESG regulations. Widespread protests by farmers throughout the EU have been spurred, in part, by sustainability-related protocols that have increased operating costs and reduced profit margins.
Why is Elon Musk against ESG?
Musk himself became a vocal critic of ESG ever since Tesla was first booted from the S&P 500's sustainability index a year ago. After Fortune reported some two weeks later about allegations over fraudulent ESG investing by Deutsche Bank, Musk claimed all ESG lists were suddenly fraudulent.
Since ESG funds invest in companies that utilizes resources sustainably, is sympathetic to the well-being of its employees, stakeholders and society and is committed to clean governance, the potential risks are reduced.
| Pros | Cons |
|---|---|
| Can help investors diversify their portfolio | ESG funds may carry higher than average expense ratios |
| May reduce portfolio risk | ESG investing is still a fairly new concept and there isn't a ton of reporting on performance |
Examples of ESG scandals. Johnson and Johnson failed to disclose Neutrogena and Aveeno sunscreens contain the carcinogen benzene, a cancer-causing chemical (Downs et al., 2021). Johnson and Johnson announced a voluntary recall of selected Neutrogena and Aveeno aerosol spray sunscreens on July 14.
Another headwind adversely working against companies embracing ESG opportunities is how the weight of the pressure from multiple stakeholders impacts short-term decision-making by senior executives and corporate directors.
Companies with a low ESG score are thought to have the worst environmental, social, and governance impacts. Undesirable ESG scores have also been linked to rising poverty levels in the communities where the firm operates, as well as poor employee mental health.
Republican politicians have criticized ESG because they say they consider it an effort to use financial tools for the purpose of advancing liberal political goals.
ESG investing for LGBTQ+ diversity and inclusion
ESG investment offers an attractive way for the LGBTQ+ community to use its combined wealth to support corporations with strong diversity and inclusion policies.
One of the biggest criticisms of ESG is that it perpetuates what it was partly designed to stop – greenwashing.
Critics say ESG investments allocate money based on political agendas, such as a drive against climate change, rather than on earning the best returns for savers. They say ESG is just the latest example of the world trying to get “woke.”
Is BlackRock moving away from ESG?
BlackRock's decision to shift from ESG investing to transition investing marks a significant evolution in the sustainable investing landscape. This strategic move underscores the importance of actively supporting transitioning companies to drive accelerated change.
- Climate change (mainly fossil fuel companies): 1 Cenovus Energy; 2 Suncor; 3 China Energy; 4 ExxonMobil; 5 Shandong Energy;
- Controversial weapons (cluster munitions, nuclear etc.): 1 Poongsan; 2 Northrop Grumman; 3 General Dynamics; 4 Larsen & Toubro; 5 LigNex1;
ESG controversies score consists of 23 ESG controversy topics, including anti-competition, business ethics, intellectual property, tax fraud privacy, environmental issues, diversity & opportunity, etc.
Activist investors are expected to carry out fewer environmental and social campaigns this year after the strategy proved less lucrative than other shareholder agendas, according to business consulting firm Alvarez & Marsal Inc.
These days, ESG investments have lost their luster given high interest rates, political backlash, and greenwashing scrutiny.
