ESG = Essentially The Same Garbage

In recent years, Environmental, Social, and Governance (ESG) investing has gained immense popularity. The premise was, invest in companies whose approach had a broader impact on society and the environment, which attracted both individual and institutional investors eager to align their portfolios with their values. This is what my firm, LCM Capital Management Inc, kindly refers to as “concede to the peer pressure and follow the fad.” Never a good way to invest in our view.

The actual original performance results have been abysmal at best. For the full year 2023, $13 billion was pulled from ESG funds. All in all, it was the “worst calendar year on record,” wrote Alyssa Stankiewicz, Morningstar’s director of sustainability research. However, if you look under the hood today, what you will find is a transformation by Wall St which has turned this ESG investing theme into nothing more than Essentially the Same Garbage.   

One of the original proponents of ESG investing, BlackRock’s CEO Larry Fink, started pressing companies, by attempting to use BlackRock’s size and muscle, to mandate corporations to implement ESG into their business models. Uncle Larry recently stopped using the term ESG in early 2023 saying it has become too politicized. What we find comical is, he does not possess the humility to admit he started the politicization.

Despite Mr. Fink’s and many others’ intentions, ESG investing has turned into a bust. This has led to the surprising closure of many ESG funds, which is no surprise to LCM Capital Management. According to Bloomberg News, more ESG funds have closed in 2023 than in the last three years combined. Morningstar data shows that big investors including State Street, Northern Trust and BlackRock, have all closed funds. Yes, you read that right, even BlackRock. Oh, the irony.

Why has this happened? There are plenty of reasons, challenges and drawbacks, in our opinion, but most importantly, is the inability to make money for one’s investors, which should be the primary reason for starting a mutual fund. Do not get us started on who actually is the one party who always makes money on mutual funds and investing fads. One of the great attributes of Wall St. is the ability to pivot and create new rules that benefit themselves first.

The reality is that one of the primary disadvantages of ESG investing lies in the lack of standardized criteria and metrics. Unlike traditional financial analysis, where metrics such as earnings per share or price-to-earnings ratios provide clear benchmarks, ESG criteria, thanks to Wall Street, can be very subjective and significantly vary between different providers and investors. This lack of uniformity makes it, in our view, impossible for investors to compare ESG ratings and more importantly, for mutual funds to accurately evaluate the true impact of their investments. We believe this is intentional.

Another significant challenge facing ESG investing is kindly referred to as “greenwashing.”  Greenwashing is a deceptive practice where companies portray themselves as more environmentally or socially responsible than they actually are to attract investment. This is where subjectivity comes into play. It’s similar to the Climate Change investing fad, formerly known as Global Warming, where companies predict that they will be carbon neutral, for example, by 2050. These companies can’t accurately predict what their earnings will be in two years but we are supposed to believe them when they say that in 26 years, they will be Carbon Neutral? Hell, most of us reading this article won’t be alive by then, not to mention the CEO’s making these predictions, so who’s going to call BS on them in 26 years?

Taking a much closer look into this investing fad one realizes there is very little difference between some of the largest ESG funds. Mr. Fink’s I -Shares manages some of the largest ESG funds (or at least the ones they haven’t closed). Here is the fund’s objective for their MSCI World SRI UCITS ETF (SRXIF) states, The Fund aims to achieve a return on your investment, through a combination of capital growth and income on the Fund's investments, which reflect the return of the MSCI World SRI Select Reduced Fossil Fuel Index, the Fund’s benchmark index (Index).

Then there is the I-shares Global Clean Energy ETF (ICLN), whose objective aims to achieve a return on your investment, through a combination of capital growth and income on the Fund’s assets, which reflects the return of the S&P Global Clean Energy Index, the Fund’s benchmark index

Don’t forget about the I-shares MSCI USA ESG Screened ETF (SDUS) - its objective aims to achieve a return on your investment, through a combination of capital growth and income on the Funds’ assets, which reflects the return of the MSCI USA ESG Screened Index, the Fund’s benchmark index (Index).

Yes, those are all “different” funds investment objectives. Now take a look at what they hold since surely that must be the differentiator right?

The I-shares Screened ETF holds Nvidia (NVDA), Microsoft (MFST), Apple (AAPL), Amazon (AMZN), Meta (META), Google (GOOG), Eli Lilly (LLY), Broadcom (AVGO) and JP Morgan Chase (JPM).

The I-shares MSCI World holds Nvidia, Microsoft, Tesla, Walt Disney, Home Depot, Pepsi and BlackRock.

Looking at another large ESG fund but different fund family, Xtrackers ETF (XZMU) owned by German based DWS, their MSCI USA ESG top holdings are Nvidia, Microsoft, Google, Eli Lilly, Tesla, Home Depot.

Or take a $2+ trillion asset manager out of France, Amundi; the top holdings of their largest ETF fund, MSCI USA Climate Net Zero ETF, are Nvidia, Microsoft, Texas Instruments, Home Depot, Adobe, Walt Disney.

Exhausting isn’t this?

There are nearly 600 ESG Funds that exist today according to a recent Morningstar report. According to Bloomberg, 27 ESG funds have already closed so far in 2024. Our point to all of this is always the same when it comes to investing in mutual funds or even ETF’s: “buyer beware.” You need to do your homework and look under the hood. My industry prefers not to explain in detail what exactly you own, because if they did, as hopefully we just showed you, it’s NOT typically as advertised. You’d never buy a car without walking completely around it and test driving it. You should do the same with your investments. If you own non-ESG funds, look at the holdings of those investments, you might be surprised to see the redundancy in holdings between non-ESG and ESG funds. Investors believe that if they own several different funds, or fund families or styles of investing that they are diversified. Chances are, you’re not.

Don’t get caught in this Wall St. chicanery. If you are passionate about ESG or Clean Energy, you need to make sure you’re not buying a lemon, because my industry loves lemonade and they are always thirsty!

This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.