ESG Funds Ain’t Ready for Prime Time

The GE-Alstom Block Island Wind Farm stands three miles off of Block Island, Rhode Island, on Sept. 22, 2016. Scott Eisen/Getty Images

Commentary

How green is your green portfolio?

There’s a relatively new trend in investing called ESG. ESG stands for “environmental, social, and governance,” which generally means investing with an eye to sustainable outcomes.

Marketwatch defines it like this, “The point of sustainable investing is to use personal values to invest in companies the person believes will have a positive impact and outperform in the long run, the basis of the idea of ‘doing well by doing good.’”

Unfortunately doing good doesn’t always lead to doing well.

That same article by Marketwatch revealed, “Some of the biggest environmental, social, and governance exchange-traded funds have exposure to fossil-fuel companies and ’sin' stocks like gambling and tobacco firms.”

Embracing Sin to Make a Buck

The problem really isn’t that ESG investments can’t be profitable.

The problem is many ETFs are passive funds. That means they’re set up to track larger market-cap weighted indexes. And because they do, the fossil fuel industry—which is so ingrained in our energy landscape—becomes virtually inescapable.

State Street Global Advisers run 11 ESG ETFs. Its largest, the SPDR S&P 500 Fossil Fuel Reserves Free fund, is not necessarily free from fossil fuels. While it doesn’t own companies that produce fossil fuels, it does hold refiners and utilities that use fossil fuels.

State Street head of research Matthew Bartolini told Marketwatch, “We try to focus on the name of the fund Fossil Fuel Reserves Free, not ‘fossil fuel free,’ because if it was fossil fuel free, we would probably only own about five companies.”

Still Not Ready for Prime Time

So for now, more green energy in your portfolio means less of the other green—money. And as distasteful as it sounds to some ESG proponents, investing is about making money.

I’ve said it before, green energy has a future. But it’s still very early in the game. And as a successful energy investment, it still has a long way to go.

One problem is that green-advocates are trying to force the alternative agenda.

Recently the green movement began to infiltrate the Fed. Sarah Bloom Raskin, nominee as the Fed’s vice chair for bank supervision, has made her bias known. She criticized the Fed for allowing the fossil fuel industry to participate in the initial $2.2 trillion pandemic relief package.

And she’s called on all government regulatory agencies to “be looking at their existing powers and considering how they might be brought to bear on efforts to mitigate climate risk.”

Another is the lure of “green” scam artists.

Thanks to the “save the planet” mania, in addition to government funding, venture capital started getting on board. Now every new start up is trying to label themselves as “green.”

“Now billions of dollars earmarked for sustainable investment are going to companies with questionable environmental credentials and, in some cases, huge business risks. They include a Chinese incinerator company, an animal-waste processor that recently settled a state lawsuit over its emissions and a self-driving-truck technology company,” wrote Justin Scheck, Eliot Brown, and Ben Foldy in a 2021 Wall Street Journal piece.

Someday…

I keep repeating this over and over. When it comes to green (or ESG if you prefer) investing, the market hasn’t deemed it ready for the big time. It doesn’t matter what the latest green advocate says. And to invest solely by your conscience probably won’t provide your greatest returns.

Fossil fuels are here for the foreseeable future. And oil is already over $100. Now is the time for smart investors to embrace that reality. That is, assuming you like to make money.

Funds like the Energy Select Sector SPDR Fund as well as the major integrated producers like ExxonMobil should do well in this bull energy run.