The Issues With ESG Investment Funds Below the Surface

In recent years, Environmental, Social, and Governance (ESG) investing has gained significant traction as investors increasingly seek to align their portfolios with ethical and sustainable values. In a vacuum, this is awesome news, especially as finance is a major player in our economy, and inextricably linked to the natural world.

However, beneath the surface of these investments lies room for scrutiny. Despite the rise of ESG-focused funds and ETFs, a closer look reveals that many of these investments may not be as socially and environmentally responsible as they claim. One glaring issue is the inclusion of holdings among oil companies and extractive industries, posing a challenge to the authenticity of ESG investing. I’m not going to come out and say that ESG investment portfolios are nothing more than greenwashing, however, as with any financial product, it is important to investigate under the surface as to where dollars are flowing to.

Quick disclaimer: I am not a financial advisor, this is not financial advice, this is a response to me realizing what my ESG themed Acorns account was actually invested in.

Image by Anna Nekrashevich

ESG investing is rooted in the idea that companies and funds should consider environmental, social, and governance factors alongside financial performance. Investors flock to ESG funds with the expectation that their capital will support businesses committed to sustainability, ethical practices, and social responsibility. The growing demand for these investments has led to the creation of numerous ESG-themed ETFs and funds, promising a responsible approach to wealth creation.

Investments in companies that have higher ESG scores are not even necessarily altruistic; many of these firms report higher earnings and more sustained business models over a long term.

However, how one defines what a high environmental, social and governance score is not well defined as this is a relatively new product within finance. With that in mind, I decided to dig into my investments to see just how sustainable they were.

I have been an Acorns member for a few years and I really do like their product. The fees are low and transparent, and I love getting dividends on my savings portfolio. I don’t “round-up” my savings, but do contribute to a Roth account monthly and whenever I have a few extra dollars, and being able to set up recurring and one-time investments really takes the stress out of investing, as I put money away and let it grown slowly over time. You can also select an ESG fund to invest in, in this case, the iShares ESG Aware MSCI USA ETF.

While I do genuinely like Acorns, I wish that there was a bit more disclosure on what exactly the sustainable investment option does, because it really isn’t that sustainable if one digs into the ETF.

iShares is part of Blackrock, and defines and markets the ESG Aware ETF as follows, “The iShares ESG Aware MSCI USA ETF seeks to track the investment results of an index composed of U.S. companies that have positive environmental, social and governance characteristics as identified by the index provider while exhibiting risk and return characteristics similar to those of the parent index“

As part of its investment objective this fund seeks to track an index that applies the following business involvement screens: civilian firearms, controversial weapons, tobacco, thermal coal and oil sands. The business involvement screens are based on revenue or percentage of revenue thresholds for certain categories and categorical exclusions for others. Please read the definition for each screen here.“

This is all well and good, but looking at the holdings of this ETF leads to more issues; the top 15 holdings as of 12/23/23 are shown below;

I don’t necessarily view Apple as a sustainable company, especially with how much tech waste is currently building up, but I can buy that it is probably more sustainable than some other companies, at least in aggregate. But Amazon? JP Morgan? Eli Lilly? Meta? These aren’t exactly companies that one thinks of when it comes to sustainability, or social wellbeing.

And then, there’s the energy stocks that are part of this ESG portfolio. While these shares are much smaller in comparison to the top-15, the fact that these are considered as part of an ESG portfolio does not spark joy in me.

This is not just a problem with iShares. One of the most glaring issues within the ESG investment space is the presence of holdings among oil companies and extractive industries in supposedly responsible portfolios. Other ESG funds include such companies in their portfolios, raising questions about the authenticity of their commitment to environmental sustainability. Extractive industries, including mining and drilling operations, are known for their significant environmental impact. These activities can lead to deforestation, habitat destruction, water pollution, and other ecological harm. Investors seeking to contribute to a greener future may be surprised to find that their ESG investments indirectly support such industries.

The inclusion of oil and gas companies in ESG portfolios is particularly perplexing, considering the industry’s substantial carbon footprint and contribution to climate change. ESG investors aiming to combat global warming may inadvertently be financing the very companies responsible for significant greenhouse gas emissions.

As ESG investing gains momentum, investors must exercise due diligence to ensure their portfolios align with their ethical and environmental values. Scrutinizing the holdings of ESG funds and ETFs is crucial, as the devil often lies in the details. Additionally, advocating for transparency in reporting and holding fund managers accountable for their investment choices can contribute to a more authentic and responsible ESG landscape.

ESG investing holds the promise of creating positive change by directing capital towards socially and environmentally responsible companies. However, the paradox of ESG funds holding positions in oil companies and extractive industries raises concerns about the authenticity of these investments. My issue with ESG investing is not that put altruism in the way of profits, or that it is some socialist Ponzi scheme as some conservatives decry it; it is that there seems to be a misunderstanding of what is truly sustainable in these indexes, and that makes responsible investing that much more difficult for the average consumer of these financial products. I also wish that Acorns and other index investing apps had a greater number of choices as to what sorts of products you can invest in for all members, not just those who pay extra each per month.