Take the ESG Investment Boom with a Grain of Salt

While the premise of socially responsible investments that track factors like environmental, social, and governance principles is admirable, some question all the hype.

For instance, Tariq Fancy, the former chief investment officer for sustainable investing at BlackRock, warned that sustainable investing is a “dangerous placebo that harms the public interest,” CNBC reports.

ESG investments have been gaining momentum over the past year as the coronavirus pandemic pushed investors to rethink the way the financial community interacts with the world. A recent report also revealed that sustainable investments also garnered $35.3 trillion in assets under management over 2020, accounting for over a third of all assets under management.

However, Fancy warned that there are some shortcomings in the ongoing wave of so-called socially responsible investments.

“Green bonds, where companies raise debt for environmentally friendly uses, is one of the largest and fastest-growing categories in sustainable investing, with a market size that has now passed $1 trillion. In practice, it’s not totally clear if they create much positive environmental impact that would not have occurred otherwise,” Fancy said on Medium.

This is because “most companies have a few qualifying green initiatives that they can raise green bonds to specifically fund while not increasing or altering their overall plans. And nothing stops them from pursuing decidedly non-green activities with their other sources of funding,” he added.

Fancy also pointed out that fund providers have an obvious incentive to push out ESG products since they come with higher management fees. According to FactSet data, ESG funds came with an average fee of 0.2% at the end of 2020 while more standard index-based funds had average fees of 0.14%.

Fancy also criticized other aspects of ESG investing, notably subjectivity and unreliability of data and ratings.

At the end of the day, ESG investments are still investments that need to turn a profit, which may also lead market players to think about ESG investing within a short timeframe, according to Fancy. This is especially worrisome when trying to address long-term problems like climate change and governments’ plans to achieve carbon neutrality for decades to come.

For more news, information, and strategy, visit the ESG Channel.