Here's what worries me about the trend towards "sustainable" investing. How do you hold your money manager accountable?
Think about it: if you're saying "take my money and invest it in causes I care about," you are most definitely not saying, "take my money and invest it as profitably as possible." In fact, if cause-driven investing is your goal, why would even have your money manager do it? Are they really the best trained to figure out whether, say, Pepsi should be one of your investments? Sounds like a job better suited for a think tank to me.
Moreover, how much are you paying in fees for your money manager to pick climate or "ESG" (environmental/social/governance) approved companies for you? And how do you know whether that's too much or not?
If I were a savvy money manager, I'd jump on the "ESG" bandwagon so that I could (a) attract the attention of hordes of young and/or cause-driven types to give me their money to invest, (b) charge them more than I could get away charging for index funds (i.e. zero) these days, and (c) never have to worry about whether my performance actually justified my fees because I know my new investors aren't prioritizing that anyhow.
This isn't even getting into the contradictory issues that the "ESG" moniker raises (for instance, which of the letters is most important? What if a company has great governance but isn't "environmental" enough, or vice versa? Are they in or out? Who is making those calls?).
BlackRock, which at *$7 trillion* in assets under management now has a sizable stake in nearly all of corporate America, caused a stir this week by announcing it will be "climate-first" from now on in its investments. For now, that essentially means forcing companies to disclose their sustainability plans. And there's a whole new suite of boards and task forces out there ready to help with this compliance--the SASB, or Sustainability Accounting Standards Board; the CDSB, or Climate Disclosure Standards Board; and the TCFD, or Task force on Climate-related Financial Disclosures, of which BlackRock is a founding member.
This will certainly help BlackRock--and the whole financial establishment--entrench itself at the heart of this new investing paradigm. But it's ironic that just as investors have thrown their weight behind the index revolution that has almost completely wiped out management fees, this new trend could unwind that by reallocating funds into higher-cost portfolios.
Plus, if BlackRock is successful in getting corporate America writ large more focused on "sustainability," it perhaps lessens the need for investors to pick narrower ESG funds anyhow. Again, the distinction between the two is far more art than science. (Think of oil major Shell, which now aims to be "number one" in electric power within the next decade or so. Are they, or similarly evolving oil companies, "out" while Tesla, whose electric cars are charged by a US power grid that's still more than 20% coal-fired, is "in"?)
There are plenty of other ways to pressure corporate America to get more green than by trying to discern, case-by-case, who makes the "ESG" cut or not. You could even, as suggested in Advisor Perspectives, "Buy a low-cost, passive fund, calculate the performance gain you achieve over an ESG fund, and donate that amount to charities that are aligned with your personal values."