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Environmental, social, and governance investing has become more popular — but misleading claims abound.
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The thorny truth about socially responsible investing

Think you’re investing ethically? You might be surprised.

It’s easier than ever to invest ethically — or, at least, to be told by marketers you are. Whether you’re actually doing it is harder to figure out.

Investors have become eager to put their money toward good in recent years. In 2020, assets under management using sustainable investing strategies in the United States reached $17.1 trillion, according to a report from the Forum for Sustainable and Responsible Investing. That’s one of every three dollars under professional management in the country. Investments that consider environmental, social, and governance factors— or ESG — are gaining more public attention, too. There are over 800 registered investment companies with ESG assets.

It’s good that the general public, including investors, is trying to pay attention to where money flows. What isn’t so good: Plenty of people think they’re investing in ways that match their values when in reality, they aren’t. It’s really easy to slap the ESG label onto an investment product, likely increase fees on it a little bit, and call it a day. Plenty of big investors claim they’re managing their money in an environmentally friendly, socially responsible way — and assume nobody’s peeking behind the curtain.

“What you get is an industry that knows if they put ‘ESG’ or ‘green’ on something, they can make a lot more money out of it,” said Tariq Fancy, the former chief investment officer for sustainable investing at BlackRock, who has since spoken out on the pitfalls of socially minded and ESG investing. “And you have a public that says, ‘If it says ESG on it, I should probably buy this.’”

“I compare it to the ’70s, when everybody was labeling their food as organic and the government was like, ‘Hey, there’s a definition to that word,’” said Nell Minow, vice chair of ValueEdge Advisors, a consulting firm that focuses on corporate governance. Currently, there’s no solid definition for ESG.

This isn’t to say that investing ethically is impossible — though there are some experts, including Fancy, who would argue that it is largely the case. Either way, it’s a much thornier issue to navigate than meets the eye. Plenty of people would be surprised to learn the fossil fuel-free fund they’ve got their 401(k) in isn’t so fossil fuel-free, or that the company providing them the fund — such as BlackRock, State Street, and Vanguard — may happily vote for bloated CEO pay packages and against disclosures on items such as diversity and climate.

It’s also up for debate whether avoiding certain investments and divesting actually works. When investors sell off shares of a company whose practices or business models they object to, they are giving up their seat at the table and to other investors who don’t care. Divestment campaigns, like the one Harvard announced to no longer hold direct investments in fossil fuels, are good at drawing attention to causes and creating negative PR. But in the short term, they don’t accomplish much in terms of harming companies, and in the long term, there’s debate about their financial effectiveness as well.

“The problem with the financial markets is they’re so big that you can’t possibly affect them by deciding not to own something that’s objectionable,” Fancy said. “In five milliseconds, someone who doesn’t give a shit will go buy it.”

There are steps one can take to make sure their money is aligned with their values (more on that below), but ultimately, there’s only so much individual investors can do. Regulators need to define ESG so that the people creating such funds have something to comply with, and investment professionals need to be encouraged to contemplate broader issues when advising their clients (if that’s what their clients want).

At a higher level, there’s always a question of how much good can be accomplished through investing — a corporation or industry won’t change its practices just because some people on Wall Street say so.

There’s a lot of “woke-washing” going on in socially minded investing

Most people constantly have a thousand things they’re trying to pay attention to, and what’s in their 401(k), IRA, or Betterment account isn’t generally at the top of the list.

But plenty of regular investors want to make sure they’re not harming the planet with their investments, and they think that in the long term, responsible investments will be more lucrative. They’re inclined to trust that the label on the product they’re putting their money into is accurate, and if it says ESG on it, they want to believe it.

The companies making these products are well aware of that inclination. They also know that they may be able to charge higher fees on ESG products because investors are willing to swallow them if they think it’s for the greater good, even if what’s in the product isn’t much different from what’s in any run-of-the-mill (and lower-cost) fund.

“There’s a lot of green-washing, of woke-washing, a lot of washing within this category of ESG,” said Marilyn Waite, a program officer in environment at the William and Flora Hewlett Foundation, a nonprofit charity, and the author of Sustainability at Work.

It doesn’t mean it’s impossible to do better; it just means it’s harder than it seems.

“Most people are invested and have no idea what they’re invested in, because most people invest in mutual funds — which are these baskets of stocks — and they only tell you on the prospectus what are the top 10 holdings,” said Andy Behar, CEO of As You Sow, a nonprofit that promotes environmental and social corporate responsibility. “You may hold companies that are profiting from burning down the rainforests, profiting from private prisons, profiting from climate destruction, and you have no idea. It’s very, very difficult to figure it out.”

As You Sow has created multiple tools for people to learn what’s in their investments and try to decipher whether it aligns with their goals and values. People can type in a ticker or name of an ETF or mutual fund to see how it rates in terms of fossil fuels, gender equality, or guns, among other items.

A quick spin around As You Sow’s ratings shows this ESG marketing play in action. Behar pointed to a “Fossil Fuel Reserves Free” ETF; according to his group’s analysis, it has holdings in 23 fossil fuel companies, including ones in coal and oil and gas. It’s under 2 percent of the overall fund, but it’s not nothing. “Why do you name a fund ‘fossil fuel reserves free’?” Behar said. “It’s marketing.”

Investing better means paying a little bit of attention

There’s an old maxim in investing attributed to Andrew Carnegie and Mark Twain that says you should put all your eggs in one basket, and then watch the basket. If you want to invest ethically, you have to watch the basket or leave it with someone who will.

Minow, from ValueEdge Advisors, said that the easiest way to try to move your money toward doing good (or at least not something terrible) is to take a look at your 401(k). If there’s an index fund with an ESG component in there and the potential social benefits outweigh the potential costs, consider choosing it. A next step, if you’re up for it, is to look at how funds vote their proxies, meaning ballots shareholders get to vote annually on various corporate issues.

In the case of many funds, the firms behind them vote on behalf of their individual investors, and because they have so many shares, they have quite a bit of sway. Are they voting for or against outrageous CEO pay packages? Climate proposals? Diversity requirements? Big investment managers like BlackRock say they’re paying attention, but are they?

“Either they put their money where their mouth is or they don’t,” Minow said. “If a company says we’re making a commitment to be carbon-neutral by 2050 but they don’t make that part of the CEO’s pay plan, don’t listen to them, because they’re not serious about it.”

There are ways to dive in a little more, if you’re willing to put in the energy. For people who have an investment adviser, you can talk to them about your priorities, where your money is being invested, and why. To be sure, that requires thinking about what matters to you.

“What’s the issue you care about or want to have an impact on? How are you measuring that issue and your impact? And who are you working with to do that?” said Rachel Robasciotti, founder and CEO of Adasina Social Capital. Adasina works directly with social justice groups to craft its investment strategies and offers a suite of products for investors. “What social movements say to us very often is: ‘What future are you investing in?’” Robasciotti said.

If you’re up for it and you remember, you can also vote your proxy on shares of the companies you’re invested in during their annual meetings. (You should get a ballot and information from the company ahead of time, and you can find a company’s proxy statement on the Securities and Exchange Commission’s website.) It’s a little tricky, impact-wise, because big institutions have much more voting power than individuals do, but it’s something. And some votes are non-binding, meaning management doesn’t have to do what shareholders say.

There’s also been a lot of attention and emphasis placed on divestment over the years, with activists pushing universities and pensions to just get out of investments in fossil fuels or other arenas. There’s disagreement among experts about how well divestment works.

Proponents of divestment point out that even if it doesn’t necessarily hurt companies or affect their stock price in the short term, it can make a difference in the long term in creating negative attention. “Social movements make visible that an asset is not a good investment when they mobilize investors to leave that asset. Over time, it can become a toxic asset,” Robasciotti said. This is true even if it doesn’t necessarily hurt companies or affect their stock price in the short term.

In the short term, though, selling shares doesn’t hurt the company or really ding its stock price — someone else just comes along and picks up those shares. The shares being divested are already trading among secondary shareholders, so instead of Harvard holding shares of Exxon or Chevron, it’s just some hedge fund or other investor — often an investor that doesn’t care.

“The people who have the least social interest are the ones who end up holding the stock,” said Alex Thaler, the co-founder and CEO of Ikonik, a soon-to-be-launched trading platform that lets individual investors band together for shareholder campaigns. Proponents of divestment often point to campaigns around South Africa in an effort to bring apartheid to an end decades ago, but evidence on just how much of a role divestment played there compared to other factors is mixed.

“The only thing that it does is allow people to cover their asses, because they can basically say, ‘I’ve washed my hands of it.’ Oil companies still exist,” Fancy said.

A small, climate-conscious activist investment firm secured three seats on Exxon’s board of directors in a shareholder push earlier this year, which activists say could have big implications for its climate-related activities. They wouldn’t have been able to do that had they given up their seat at the table (and, probably, if Exxon hadn’t been losing money in recent years).

You can’t save the planet with your Robinhood account

As good as it feels to believe we’re doing something about the issues we care about, it’s also true that as individuals, we can only do so much. Thinking about a problem as enormous as climate change can make you want to act, including through your 401(k). Indeed, some fossil fuel companies would much rather you think about it through the lens of what you’re doing rather than what they are. But saving the planet — including trying to help with your stocks and retirement fund — requires more than your own action and attention. The government also needs to step in.

One place to start, experts say: The SEC is working to define what ESG is, and it needs to do more. There are many inconsistencies among ESG products, and the firms offering those products are allowed to get away with a lot. The SEC and federal prosecutors are reportedly looking into Deutsche Bank’s sustainability claims, but the German bank is hardly the only one stretching the limits.

The Department of Labor is also taking a look at its guidance for ESG criteria in retirement investment plans. This can be a little wonky, but managers of retirement plans have a fiduciary duty that’s essentially to protect the investment and make money with it. And it’s not clear where issues such as sustainability and social responsibility fit into that.

Experts, such as Lenore Palladino, an economist at the University of Massachusetts Amherst, say that asset managers should be able to look at a bigger picture as part of their fiduciary duty. “There is this whole world of ESG funds and sustainable investing, but they all stay within the framework of essentially the only thing you can do with your money is put it into a fund, and the only thing the person managing that money should care about is increasing the value of money,” Palladino said. “They can’t also care about the status of the planet if that will contradict their ability to make money.”

People with a pension fund to live off during retirement also, presumably, want a planet to live on. Regulators need to open the door more for managers to take that into account. Palladino also said it should come with a bigger shift in how we think about investing.

“If you think the whole purpose of buying and selling shares in corporations is to raise the value of those corporations, but then you realize we as shareholders also live on the planet and deal with the negative externalities created, if you don’t allow for or even push money managers to take into account the fact that we are whole humans and we live in a society, then it’s not ethical investing in my view,” she said.

To be sure, there are significant limits in how much change can be accomplished through investing or shareholder advocacy. The federal government needs to act directly on climate change, and corporations do too.

Fancy, the former BlackRock chief investment officer who now runs an education nonprofit called Rumie, takes a pretty nihilistic view of the entire ecosystem of socially minded and ESG investing. His argument is that ESG products are useless — a fund just shuffles some shares around between ETFs and mutual funds, slaps a label (and likely a higher fee) on top, and keeps churning. He worries it’s a “placebo” that makes people think they’re accomplishing something when they’re really not.

“If you really care about social changes, invest your portfolio as you’ve always done, which is to get the best returns and preserve your savings, and then turn to the government and push political action around solving climate change, because that’s the only level where it can actually be solved,” Fancy said.

Many of the other experts I spoke to for this story disputed that view and held that ESG investing can work — but it requires some effort on the part of investors, and it can’t be the only thing they do.

“We’re kind of ignorantly complicit in the world that we see around us because we’re supporting the companies that are in an extractive and destructive business,” Behar said. “The core of it is to know what you want and then align it with your values.”

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