The ESG label is meant to make investing green easier by giving investors a simple way to allocate their money to good causes. And, indeed, there are plenty of sustainability- and climate change-focused exchange traded funds available.
But it’s still not the catch-all stamp of approval you’d expect.
The label started with the idea that ESG issues should be included when valuing a business. More recently, however, the emphasis has moved to the impact company’s products and services have, said Jon Hale, director of sustainability research at Sustainalytics.
“A lot of ESG funds are oriented more toward the ESG valuations rather than the impact,” he told CNN Business.
That’s why the blanket ESG designation might not mean all companies in an ETF are up-to-snuff on all fronts.
“You can’t tell just from the label. You actually have to figure out what they’re doing,” said Hale.
Problem 1: Big Tech
For example, ESG ETFs stay away from weapons manufacturers, tobacco companies or firms in the coal and oil sands businesses but still give investors access to the controversial golden geese of America’s stock market: tech stocks.
Problem 2: Tesla
From an emissions point of view, electric cars are an obvious choice for a climate-conscious investor. But electricity that fuels electric cars is still generated using natural gas or coal, and the environmental impact of battery production is less well known. That’s leaving a coal stain on Tesla’s China expansion.
“Everything is a tradeoff,” said Elizabeth Levy, portfolio manager at Trillium Asset Management told CNN Business, and consuming anything, by definition, is using up some resource. But while we might not know as much about battery production as about the impact of oil extraction, batteries still win the direct comparison, Levy said.
Tesla has reduced its carbon footprint every year for the past decade, said Dan Ives, analyst at Wedbush Securities, who covers the company.
“Trying to find the perfect company is impossible,” said Ives. “Realistically, no company is going to check every box. But if there are five boxes and [a company] checks four, that’s significant.”
Problem 3: New technologies, new problems
Bitcoin and other new technologies are part of a new ESG issue: an insatiable hunger for electricity.
For ESG investors this raises the question what environmentally friendly technologies are actually green through and through.
Problem 4: Making money
Another trade-off is performance.
So for ESG-conscious investors who want to see a handsome return, the broader funds might still be the best way to go.
ESG investing doesn’t do away with all problems in business, environmental or otherwise. But investor decisions still make a difference.
“As investors we have to invest in the future we want to see,” Levy said.
That means understanding the depth of the commitment companies are making to reach their ESG goals and how they can actually be held accountable.
“That’s one of the reasons ESG investors such as ourselves are pressuring the SEC to require climate disclosures,” which would standardize that kind of reporting, Levy added.
Shareholder activism surrounding ESG issues is also becoming more common.
“Companies are starting to realize that they have a fairly sizable amount of ESG-minded investors in their investor base,” said Hale, the Sustainalytics sustainability research director. And that’s “doing some good in terms of shifting corporate behavior toward operating with sustainability in mind.”