Interesting subject. I haven’t read the underlying study, but did the authors take into account the policy-induced shift to ESG portfolios ? Funds and managed accounts were/are shifting “automatically”, due to regulatory nudges, into the ESG compliant investments, which might explain (part of) their increased allocation.
To me there seems one pervasive flaw in ‘ESG investing’, viz How do you define ESG? To be more precise, some say it is hard for a company to be all 3 of E, S and G at the same time. Most retail investors invest via collectives (inc. mutual funds).
I looked at how the Danish paper defines ESG funds: “ … we follow prior studies classifying socially responsible or ESG funds based on their names … “ - para A on Page 10.
This follows the obvious flaw - marketing of funds attaches the name ESG to a fund whose holdings may or may not be such. I looked at a crude sample of British “ESG” funds: the contents vary from utilities (try persuading me that a sewage polluting utility is ESG) to tech companies whose links are at best tenuous. Indeed I cannot find a UK fund which is truly ESG.
We need companies which help counter climate change; and cos with good governance. So far funds are largely still ‘greenwashing’ which is cynical, sad and tragic.
Very true and I think it is a major problem for ESG that it tries to mix so many things together. Yesterday I was made aware of a new paper that tries to redefine ESG. I will read it and write a out it but here is the paper if you are interested: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4701143
It depends on your ESG philosophy. You can be deep green, and only invest in companies that have very strict ESG policies, but this significantly limits your portfolio, or you can be a lighter green by investing in companies that are the ‘best’ in their industry, allowing you a broader portfolio but still ‘rewarding’ companies that are aligned to your values.
You can also blacklist particular industries eg oil, tobacco or gambling, while having as diversified portfolio as possible outside your blacklist.
There are ESG funds that reflect all these approaches, because everyone has a different view of what it is to be ‘green’. And you know what, that’s not a bad thing!
Your post reminded me of the studies where people with more money eat better, such as organic food and less fast food, and live longer than people with less money. As you have more money, you not only take care of yourself better, but you think of doing better for the environment and the planet by investing in green stock. It may be a stretch, but more of an extending your post to see if these two are correlated.
The second point is, do you think rich people are buying more green stocks because more of them may be working with an investment company? They are provided with more investment options, which leads to more investment in some areas than the general public. Again, it may be a stretch.
I think there is definitely a correlation between eating healthier and investing green. I have not seen a study in that, though.
The second theory I think is unlikely to be true. Green investments are available to everyone these days and thanks to the fact that they have higher fees are often more heavily promoted by banks to investors with less money.
So in the end, I think the larger investments in green funds by wealthier investments has something to do with having extra money to spend on small luxuries and the virtue signalling you get from investing in green funds.
Thanks, Kylie. You make a good point - What is ‘Green’? Or ‘sort of Green’; or “not Green” (some Oil cos are developing renewables energy production. A subjective view.
Then we have ESG, with poor official guidelines. Even Governance - official guidance if ‘Put a woman on the Board’: in principle a good thing; but what if the candidate is Roedean & Oxford educated, while the alternative is a ‘black’ state school man? [Thanks, Steve Clapham]. As for ‘Social’, we enter a minefield.
I tried to find a UK Retail fund which is truly Green with holdings as in building flood defences, carbon capture, simple heat pumps that work; not general Utilities, Microsoft etc. So far I have failed.
Interesting subject. I haven’t read the underlying study, but did the authors take into account the policy-induced shift to ESG portfolios ? Funds and managed accounts were/are shifting “automatically”, due to regulatory nudges, into the ESG compliant investments, which might explain (part of) their increased allocation.
Yes they did.
To me there seems one pervasive flaw in ‘ESG investing’, viz How do you define ESG? To be more precise, some say it is hard for a company to be all 3 of E, S and G at the same time. Most retail investors invest via collectives (inc. mutual funds).
I looked at how the Danish paper defines ESG funds: “ … we follow prior studies classifying socially responsible or ESG funds based on their names … “ - para A on Page 10.
This follows the obvious flaw - marketing of funds attaches the name ESG to a fund whose holdings may or may not be such. I looked at a crude sample of British “ESG” funds: the contents vary from utilities (try persuading me that a sewage polluting utility is ESG) to tech companies whose links are at best tenuous. Indeed I cannot find a UK fund which is truly ESG.
We need companies which help counter climate change; and cos with good governance. So far funds are largely still ‘greenwashing’ which is cynical, sad and tragic.
Very true and I think it is a major problem for ESG that it tries to mix so many things together. Yesterday I was made aware of a new paper that tries to redefine ESG. I will read it and write a out it but here is the paper if you are interested: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4701143
It depends on your ESG philosophy. You can be deep green, and only invest in companies that have very strict ESG policies, but this significantly limits your portfolio, or you can be a lighter green by investing in companies that are the ‘best’ in their industry, allowing you a broader portfolio but still ‘rewarding’ companies that are aligned to your values.
You can also blacklist particular industries eg oil, tobacco or gambling, while having as diversified portfolio as possible outside your blacklist.
There are ESG funds that reflect all these approaches, because everyone has a different view of what it is to be ‘green’. And you know what, that’s not a bad thing!
Interesting study and post.
Two thoughts:
Your post reminded me of the studies where people with more money eat better, such as organic food and less fast food, and live longer than people with less money. As you have more money, you not only take care of yourself better, but you think of doing better for the environment and the planet by investing in green stock. It may be a stretch, but more of an extending your post to see if these two are correlated.
The second point is, do you think rich people are buying more green stocks because more of them may be working with an investment company? They are provided with more investment options, which leads to more investment in some areas than the general public. Again, it may be a stretch.
I think there is definitely a correlation between eating healthier and investing green. I have not seen a study in that, though.
The second theory I think is unlikely to be true. Green investments are available to everyone these days and thanks to the fact that they have higher fees are often more heavily promoted by banks to investors with less money.
So in the end, I think the larger investments in green funds by wealthier investments has something to do with having extra money to spend on small luxuries and the virtue signalling you get from investing in green funds.
Suckers
Thanks, Kylie. You make a good point - What is ‘Green’? Or ‘sort of Green’; or “not Green” (some Oil cos are developing renewables energy production. A subjective view.
Then we have ESG, with poor official guidelines. Even Governance - official guidance if ‘Put a woman on the Board’: in principle a good thing; but what if the candidate is Roedean & Oxford educated, while the alternative is a ‘black’ state school man? [Thanks, Steve Clapham]. As for ‘Social’, we enter a minefield.
I tried to find a UK Retail fund which is truly Green with holdings as in building flood defences, carbon capture, simple heat pumps that work; not general Utilities, Microsoft etc. So far I have failed.