Environmental, social and governance mutual funds and other investment products were created as marketing gimmicks – with no real economic basis – so I never expected them to last. But neither did I expect their whimpering demise so quickly. Some of the largest investment firms are shuttering ESG-labeled funds this year, after spending several years trying to capitalize on increasing and widespread interest in social responsibility.
BlackRock, Hartford, Janus, Columbia and Fidelity have all closed or announced the coming closures of funds purporting to promote good corporate governance practices, sustainable energy policies and social justice. What these swift ESG fund birth-to-death cycles remind us is that while some people use their investment decisions to virtue signal, if it costs them money, they won’t do it forever.
A few years ago, in an attempt to profit from the increased interest in ESG issues, more than 60 mutual fund companies simply changed the names of existing funds, adding the term “sustainable.” The USAA World Growth Fund became the USAA Sustainable World Growth Fund. Sadly, other than the name, the only thing that changed was the fund’s expense ratio, increasing almost 50%. The top holdings of the fund remained unchanged.
The American Century Fundamental Equity Fund had been losing investors for years. After rebranding it as the Sustainable Equity Fund, investors poured $1.3 billion of new money into the fund.
Mutual funds defined the term ESG so broadly that it has no functional meaning. The Securities and Exchange Commission has taken note, however, as this month it announced fines against a division of Deutsche Bank for failing to follow the ESG investment processes it marketed when selling its ESG mutual funds.
I am not suggesting it isn’t important for companies to act decently. The most sustainable system of producing shareholder profits includes treating employees and customers fairly.
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The environmental part of the ESG term is important, but it is almost impossible to define and measure the environmental impact of a large organization with decimal precision – which is why S&P no longer issues ESG scores linked to its credit analysis. Someone finally realized that the ESG measurement charade couldn’t continue with a system that determined cigarette company Phillip Morris was more “environmentally sustainable” in its business practices than Tesla.
If you are going to own mutual funds, it is practically impossible for you to evaluate subjective features of the companies within the fund. My simple advice on how to be a socially responsible investor/citizen is to make as much money as ethically possible, and then use some of the money to help others. But that little system doesn’t make for a flashy mutual fund marketing campaign.