It’s no surprise that a recent article found that ESG investing has failed to achieve many basic ESG goals
As noted in the article “The Trillion-Dollar Fantasy” by Ken Pucker in the Sept. 13, 2021 issue of Institutional Investor magazine, many money managers and investment firms have heartedly adopted the ESG theme. The problem is that the benefits of ESG (Environmental, Social, and Governance) investing have not materialized yet.
As Pucker writes: “Investors and others slowly recognize that ESG investing, as currently practiced, will not likely lead to financial outperformance and is mostly unconcerned with planetary impact.”
This is not the first time the investment industry has over-promised on an investment theme with wide appeal.
It’s also not surprising because the investment industry always needs to find a new shiny object to dangle in front of retail and institutional investors. Fund marketers need to look for these shiny objects because the investment industry is essentially devoid of new ideas that appeal to investors. 
In many cases, this explains why there are intentional efforts to mislead investors and shareholders when marketing managers see a new investment theme that has mass appeal, but the fund company doesn’t yet have the appropriate product.
When fund companies realize they are still in the starting gate, they rush to market, even if the fund is in its earliest development phase. This is the old model from the software industry, (MS Office 1.0), and we now see it in the proliferation of ESG funds.
This helps explain the astronomical growth of ESG investing, which now has $3 trillion in assets worldwide, an increase from about $1 trillion in 2018. This explosive growth is something no fund marketer can ignore. But, it also means many funds developed their marketing pitch before they had the operational mechanisms in place to monitor and impact corporate behavior to comply with ESG values. It also helps explain why some ESG funds have failed to meet their stated non-investment objectives.
History Repeats Itself
Over-hyping investment benefits are not new in the fund business.
When target-date funds were introduced in the early-1990s, they had many positive marketing aspects. But as more funds copied the idea and rushed into the 401k market, they ignored some obvious problems. Many fund companies saw target-date funds as a way to inject new money into lackluster and moribund funds. By re-packaging these underperformers into a target-date package, the funds got a new lease on life. This occurred even when fund sponsors and managers knew they had a substandard performance. This is akin to a chef who adds bad ingredients into a recipe, hoping no one will notice.
By inserting these dog funds into a mutual fund company’s target-date family, unsuspecting 401(k) investors would not focus on the ingredients. Instead, they would be distracted by the frosting on the cake: the merits of a target date, a set-it-and-forget-it fund that would manage their investments through the work years and often into retirement. Never mind if the risk allocations were sketchy or proved too risky or conservative over time. Instead, the company’s 401k recordkeepers and H.R. departments sold target-date funds to their less sophisticated investor-employees.
This is the same model used to popularize ESG investing. ESG has all the bells and whistles to attract younger investors and others concerned about economic injustice, corporate pilferage of the rainforests, abusive employment practices, corporate polluters, and abusive corporate management practices.
The message was bolstered when some studies showed that ESG delivered investment returns that were on par or exceeded major indices. The combination of social good and attractive return possibilities presented a powerful and attractive package to investors.
The marketing people at major mutual funds and institutional money managers, many of whom have not had an original marketing idea in years, now recognized a new way to reach a new, younger audience with ESG investing. All they needed was a new banner to attract a crowd. “Invest in your values,” and “impact investing.” One fund created the term “social entrepreneurs” and naively trumpeted that “impact investing is becoming the new normal.”
Given the proliferation of social media and a strong interest in day trading, commission-free investing and lemming-like stock picks, ESG investing soon found a large, global audience.
It didn’t matter that the concept of social investing first emerged in the late-1970s. Still, in 2021, it had a new, more inclusive incarnation of combining corporate accountability, environmental standards, and a promise of improved positive societal impact.
But was all this possible from the notoriously reactionary and conservative financial services industry?
After all, this was the same industry that spent decades and millions in lobbying money working to delay and defeat the U.S. Department of Labor’s fiduciary standard regulations that prescribed more transparency in fees, expenses, and conflicts of interest between financial salespeople and investors.
So, how could this same industry that values having “the edge” on any customer, investor, or counterparty now become a beacon for ESG values and goals?
Before ESG There Was Social Investing
While the Pucker article arbitrarily marks the decade beginning in 2000 as the start of ESG investing, its origins began almost 50 years earlier.
As a reporter with Pensions & Investments in the late-1970s in Chicago, I covered the first application of social investing when it was applied by the progressive Jane Addams Hull House pension fund. At the time, their social investing target was the apartheid policies of South Africa. A board member of the General Motors pension fund, one of the nation’s largest at the time, the Reverend Leon Sullivan, was spearheading efforts on behalf of the G.M. pension fund to pressure the South African government to abandon apartheid.
The Jane Addams fund added more pressure by asking its managers to create South Africa-free portfolios that eliminated any corporation doing business with South Africa. It was one of the first times that a corporate fund had developed an investment policy focusing on correcting a social issue instead of just generating an investment return or diversifying a portfolio.
Fast forward about 50 years, and the next phase of social investment becomes ESG investing. The difference is that the $23 trillion mutual fund and money management industries had historically neglected to use their significant political power for anything other than bolstering the status quo. For decades, the investment industry knew they were investing in companies that polluted, abused employees, engaged in anti-community practices, supported elected officials who opposed social safety nets, and endorsed policies that increased wage inequality.
What better way to cover up those decades-old, anti-societal investment practices than for investment firms to hang out a shiny new shingle saying, “We Now Offer ESG Funds That Can Save the World.”
And as the Institutional Investor article points out, at best, that’s an intentional misrepresentation. As Pucker, the article’s author writes, “As ESG investing has been accelerating, the planet has experienced the warmest two decades on record, Antarctica has been melting, U.S. income inequality has been gapping, and species have been disappearing at rates unseen for millennia. And the Dow Jones Industrial Average is hitting new highs, and asset managers are collecting attractive fees to oversee a popular new investment category.”
In short, despite the trillion dollars invested in ESG funds, shareholders and investors have been tricked again by some very well-paid marketing people that focus on the soft side of investing (ads, P.R., webinars) to invest in a product that fails to meet its touted goals. At the same time, portfolio managers spin glowing stories about their ESG company holdings and how many tons of carbon emissions are not reaching the atmosphere.
This is not to say the investing industry has not introduced revolutionary new products that positively impact investments worldwide. I worked on introducing stock, commodity index, and interest rate futures that advanced risk management practices. These products provided the foundation for new strategies that launched hedge and a variety of alpha-generating funds, allowing all industries to manage their financial risks better. But these advances were on the product, not the marketing side.
All this takes us back to the problem with the false, or less-than-accurate, marketing surrounding some ESG funds. The danger is that, like those carbon clouds, too much ESG investing relies on opaque marketing developed by some well-paid investment industry marketers who often have a deficiency of new ideas.
Crypto is the Next Big, False “Investor Revolution”
So, as the ESG saga unfolds to attract more unsuspecting investors, financial marketers are now working on the next big investment industry marketing scam: cryptocurrencies. The current drumbeat is that crypto belongs in your portfolio, just like the gun makers say every home needs an automatic weapon. Don’t even think about asking which crypto firm will be issuing dividends or has low-risk, long-term performance. Instead, investment managers insist these traditional financial metrics should not even be considered.
When a large number of investment marketers insist that target-date funds, ESG investing, and crypto all belong in your portfolio, caveat emptor. Each product has its merits, but they are not all of the same quality. The buyer (investor) must do their due diligence to separate the haves from the have nots.
The investment industry only lives by making money. Like sharks, the industry has to move constantly and attract capital to stay alive. If there are casualties along the way, in the form of investing in fake ESG companies that are polluters or abuse employees, it can be explained away if they are even publicized.
This is how the industry operates. Any new idea that has sizzle and passes specific profitability screens will be heartily welcomed, adopted fully by early advocates, and finally co-opted by the late adopters.
ESG investing is an example of this process. ESG is an excellent idea with huge possibilities. But it was grossly oversold when it was tagged as part of an “investor revolution” or as an investing engine that would reform corporations built on abusive business practices against employees, customers, society, or the environment.
Don’t Be Fooled By An Impending “Investor Revolution”
No investor revolution will ever come from inside the financial services industry. It is inherently conservative, increasingly neoliberal, and is on record as opposing all types of pro-investor reforms in banking, credit, and investing.
In addition, the industry cannot regulate itself. Greed is part of the industry’s DNA. Consider the huge fines levied against some of the world’s largest banks and investment firms. In 2020, Goldman Sachs, Wells Fargo, and JP Morgan Chase paid $7.85 billion in fines, according to Finbold’s ‘Bank Fines report. These financial violations happen even when every financial company has a large compliance department.
As their substantial lobbying budgets show, the financial services industry is the guardian of the status quo. Their priorities are an open secret: lower corporate taxes, little or no regulation, privatization of public services and utilities, including Social Security, Medicare, and Medicaid, and no government intervention (state or federal) since all social and financial matters should be resolved via the so-called “free market.”
The financial services industry is also based on a classic economic model that never considered pollution, worker abuses, or any negative impacts on society as having anything to do with the merits of classical financial analysis. That’s because economics considered these negative societal factors as “externalities,” or events that had nothing to do with corporate financial balance sheet analysis.
So, where does this leave ESG investing?
The best way to correct the misleading marketing is to name the firms that mislead well-meaning ESG investors. Watchdogs should issue an ESG scorecard naming firms that invest in companies with low or no ESG ratings yet purport to be helping the planet. It’s time to call out the scammers so that investors can separate the real from the fake. 
It’s also time to realize that significant ESG progress cannot be made by applying financial pressure alone. Activism at the local level is the proven way to advance change.
Writing a check alone to an ESG fund, however positive their record, will not readily change profitable businesses modeled on anti-ESG values. Nor will most prominent Wall Street firms pressure errant corporations to make needed changes that benefit the planet.
As Aesop’s fable, “The Scorpion and the Frog,” showed us, the scorpion who convinced the frog to give him a ride to the other side of the river and then stung him to death, explained to the frog that stinging him was what scorpions do. It’s in their DNA.
Investors should remember that fable when so many Wall Street firms crowd into the ESG marketplace promising an “investor revolution.”
