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Investors are increasingly thinking green in the pursuit of greenbacks.
Capital inflows into ESG (environmental, social, and governance) focused funds have soared to a record $22 billion in 2020, already three times the total inflows in 2019, according to data from Bloomberg.
In a year filled with natural disasters, extreme weather and inequality, you couldn't be blamed for assuming it was investors' collective conscious pushing for ESG. Au contraire:
- According to a recent survey by investment manager Nuveen, 53% of investors cited higher returns as the primary motivation for investing in ESG funds.
- Interestingly, just 34% of investors chose ESG funds because of "concerns of climate change."
Whatever the motivation, the industry is listening. Seventeen new ESG-focused ETFs have launched so far this year, up from 10 in all of last year. ESG funds have raked in over $4.1 billion in October, on track for their best month since at least 2013.
The Problem With ESG
The Securities and Exchange Commission does not regulate how the "ESG" label is applied, and it is increasingly being used as a marketing tactic.
Investors might be surprised at what they find under the hood:
- BlackRock (the world's largest asset manager with nearly $8 trillion in AUM), leads the pack in ESG investing. Their largest ESG fund, "ESGU," screens for companies involved in civilian firearms, controversial weapons, tobacco, thermal coal and oil sands. Interestingly, ESGU also holds shares of Exxon and Chevron.
Because ESG rankings are inherently subjective, analysts say they can be manipulated by so-called "greenwashing," where companies paint an undeserved image of environmental and social responsibility through marketing and promotional efforts.
Agree To Disagree: A research paper from MIT Sloan School of Management found the correlation of five raters’ ESG scores averaged 0.61, compared with a 0.99 correlation of credit ratings from Moody’s Investor Services and S&P Global Ratings.
In plain English - analysts can agree which companies are credit-worthy, but not on which are performing their social duty.