Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Market Commentary

What’s wrong with ESG Investing?

Ethical people need to be skeptical of Environmental, Social and Governance Investing (ESG) or ESG Investing.

In theory, ESG investors only buy companies with high ethical standards. For example, companies that do not burn fossil fuels, abuse or exploit customers, or mistreat employees.

However, many ESG funds and recommendations contain companies that engage in unethical practices. For example, the Xtrackers MSCI USA ESG Leaders Equity (USSG) ETF contains Johnson & Johnson (NYSE: JNJ) and the Walt Disney Company (NYSE: DIS).

Some Unethical ESG Investments

For example, a New York State jury alleges Johnson & Johnson sold baby powder that contained asbestos to people.

In addition that jury claims the asbestos caused cancer in some women, claims. Therefore, Johnson & Johnson’s ESG status is debatable.

Meanwhile, the Working for the Mouse survey of 5,000 Disneyland employees alleges that 74% of Disneyland cast members do not earn a living wage, Newsweek claims. In detail, Working for the Mouse fund 85% of Disneyland Resort employees earn under $15 an hour and over 50% of Disneyland employees make less than $12 an hour.

In contrast, Disney shareholders approved a $35 million compensation package for Disney CEO Bob Iger in March 2019, CNN Business reports. In particular, Iger could receive a $12 million bonus, a $3 million a year salary, and $20 million in stock.

Therefore, both Disney and Johnson & Johnson’s ESG status is questionable. Both companies face allegations of unethical behavior.

Some Anti-Social ESG Investments

Some ESG indexes are not socially responsible. For instance, the S&P 500 Fossil Fuel Free Index (Ticker: SP5F3UP) contains Facebook (NASDAQ: FB).

The Myanmar (Burma) weaponized Facebook to promote genocide against Myanmar’s Rohingya Muslim minority, The New York Times alleges. Facebook admits its social network was used to incite violence in Myanmar, The New York Times reports.

Therefore Facebook is not a socially responsible investment. However, the S&P 500 Fossil Free Index contains Facebook, because the Social Network burns no fossil fuels. Hence, Facebook violates one tenant of ESG investing, even though the S&P 500 Fossil Free promotes it as a responsible investment.

Some Fake Environmental ESG Investments

Similarly, some ESG funds; including the Fidelity® U.S. Sustainability Index Fund (Ticker: FITLX), own large amounts of Alphabet (NASDAQ: GOOG) and Microsoft (NASDAQ: MSFT).

Alphabet and Microsoft have small environmental footprints because of their businesses’ nature. To explain, most of Alphabet and Microsoft’s products are digital, so they create little or no pollution.

However, Alphabet and Microsoft run on electricity they could generate by burning fossil fuels. Alphabet and Microsoft get a good ESP rating because other companies, utilities by burning fossil fuels.

For example, Microsoft receives a low total ESG risk score of 15 because of a low environmental risk score of 0.4. from Sustainalytics Inc. However, Berkshire Hathaway (NYSE: BRK.B) receives a high environmental risk score of 42.5 because it owns pipelines, coal-burning power plants, and stock in oil companies.

Yet Berkshire Energy invested $6.5 billion in solar projects through 2018.  Berkshire’s solar projects include two of America’s biggest solar energy farms. Therefore, a company making major investments in sustainable electricity receives a bad ESG sustainability score.

Thus, ESG investors could be well-advised to ignore ESG scores and look at company operations instead. Additionally, I think avoiding so-called ESG funds is a smart move. Many of those funds contain companies with high ESG scores that make dubious choices.

Smart ESG Investing

I think the smartest ESG investing strategy is to buy individual stocks instead of ESG funds. That way you can control what you buy and dump any company that violates your values.

Something to remember is that many companies will meet one ESG criteria but not another. Facebook, for instance, has a low sustainability score of 1.5 but a high controversy score of four out of five, Yahoo! Finance estimates. In addition, Facebook has a moderate social risk score of 18.7.

Thus, another good strategy for ESG investors is to monitor the news. Thus, you could spot unethical behavior by companies such as Johnson & Johnson’s asbestos baby powder.

The moral of the story is to be skeptical of any claims of ESG by fund managers. In many cases, low ESG scores mask unethical actions by companies.