How do I know if my ESG investments are doing any good?
ESG, or environmental, social and corporate governance criteria, has become a lightning rod for contention. The right says it’s woke hogwash, and the left says it can save the planet. But few can say what ESG has actually done.
Why can’t we measure in polar bears?
If you’re putting in the effort of researching companies, deciphering ESG scores and choosing investments, you probably want to know what your dollars are actually doing.
I’ve long wished for an app that would tell you exactly how many polar bears you’re saving with X number of dollars in ESG investments. Unfortunately, ESG statistics and impact reports don’t deal in polar bears.
Measuring ESG’s output of good is tricky. “Good” is not necessarily a concept we all agree on. Plus, to show how a company is doing, ESG uses numerical scores that are not easily deciphered.
Here’s one example: A major energy drink manufacturer had an ESG score of 0. The company massively reduced the amount of forced labor in its supply chain thanks to shareholder interventions, says Andrew Behar, CEO of As You Sow, a nonprofit working to increase corporate environmental and social responsibility.
Reducing forced labor was overwhelmingly better for the brand, and the return on investment outweighed the cost of implementing new practices. Much of the focus of making this change was on improving the company’s ESG score (which went from 0 to 26 out of 100), but the result was a significant reduction in forced labor.
Greenwashing and ESG
How do you assign a number to positive impact? There are a few ways, such as pounds of carbon prevented from entering the atmosphere, or dollars donated to charity, but even those numbers can be misleading. Those misleading, or sometimes entirely false, claims are called greenwashing.
Many automated financial advisers, or robo-advisers, now offer impact portfolios. Those portfolios are typically made up of exchange-traded funds built along certain themes, such as investing in clean energy. A few say they donate to charities. But several of these funds haven’t donated a dollar.
ESG is a grading system that can be used to combat greenwashing by providing quantitative data. But since the term “ESG” isn’t regulated, that can cause even more confusion.
“We did a report where we noticed that there were 90 mutual funds with ESG in their name, and 60 of them got a D or an F on ESG from us,” says Behar. “So we did an analysis of their prospectuses. The bottom line is that the prospectus language is in no way correlated to the holdings, and no way correlated to the [fund] name.”
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