In ESG part I we discussed the merits of ESG investing, largely that your pension or investment money can alter corporate behaviour to induce positive social and environmental changes in society.

Providing a financial incentive for companies adopting greener practices is certainly a step in the right direction.

Sadly, ESG investing is not without its flaws:

ESG funds are not squeaky clean.

The lack of ESG regulation means that each independent research and ratings agencies take it upon themselves to decide their own ESG ratings and what constitutes “ESG-friendly”. The subjective nature means that many companies and governments with poor reputations can score high ESG ratings.

According to the Financial Times, Vanguard’s popular “US ESG” exchange traded fund has Facebook and Amazon as two of its largest individual stock holdings, both famous for data breeches, tax avoidance and abhorrent working conditions.

Similarly, JPMorgan’s ESG EMBI Global Diversified Index is weighted towards issuers “ranked higher on ESG criteria”. Upon closer inspection, 37% of bonds in the index are issued by countries labelled “not free” by human rights campaign group Freedom House, with large weightings in the UAE and Saudi Arabia.

Even if the “ESG-friendly” label wasn’t open to interpretation, most ESG funds merely apply a larger weighting towards these ESG-friendly stocks, meaning that most ESG funds still contain non-ESG-friendly companies!

There are also issues of virtue signalling and greenwashing, whereby appearing ESG-friendly is for marketing purposes only, with directors doing the bare minimum to appear virtuous and socially responsible.

Are there any ESG alternatives?

While ESG is the most popular form of virtuous investing, it is not the only method.

Socially responsible investing (SRI) is a more personalised approach. SRI is an investing strategy that helps align your money with your own personal beliefs and values.

With the help of your financial advisor, you can hand-pick your own portfolio to only include companies you believe are making a positive impact on the planet.

SRI allows you to exclude any organisations you do not feel comfortable investing in (e.g. Coal, gas, tobacco, fast food) that are common in most portfolios.

You can also invest in a specific industry or area you are passionate about (health and fitness, charities, renewable energy, organic food products…)

Similar to ESG investing is impact investing and conscious capitalism, both methods require firmer commitments to social and environmental issues. Consequently, as is likely with SRI, more virtuous investing will mean smaller returns.

Finally, there are a few banks such as Tandem Bank that offer generous interest rates on savings accounts, where all your money goes towards green lending.

Accepting the possibility of lower returns in ESG alternatives for greater social benefit is part and parcel of responsible investing, and it is entirely up to you.

 

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