We are living in the time of “the conscientious consumer,†with more money flowing into sustainable and socially conscious companies than ever before. Investors are signaling that they want to do good with their money by investing in companies that share their values. This interest has spawned a rapidly growing type of investing known as Environmental, Social, Governance, or ESG.
What was once a type of investment believed to necessitate a sacrifice of returns in exchange for ethical values is now seen as a lucrative strategy for mitigating risk and identifying niche opportunities for growth. As of 2020, ESG makes up over one-third of the total investment pool in the U.S. and has grown over 50% since 2016(1)(2).
In general, Environmental criteria includes carbon footprint, natural resource management, pollution, and environmental stewardship. Social criteria includes the ways in which a company treats its employees, partners with suppliers, serves its customers, and interacts with its community. Governance criteria includes executive diversity and pay, transparency, and shareholder rights.
Beyond these general guiding principles, there are no standardized regulations or definitions of these relatively subjective criteria. While many companies take ESG principles seriously, the lack of regulatory oversight combined with the rapid growth of ESG investing inevitably leads to “greenwashing.†Greenwashing happens when inflated claims of sustainability and social responsibility are marketed to curry favor from those who care about ESG, including consumers, investors, and employees. The ESG trend has led to bandwagoning and over amplification of ESG principles in investment funds and company claims in order to reap the benefits of participating. Greenwashing has become rampant across all sectors.
The hope of ESG is that as it continues to take up greater shares of the asset management pool, more companies will be incentivized to implement stronger ESG standards. However, greenwashing in ESG investing is rampant — one study estimates that 55-70% of funds promising ESG goals exaggerated or fell short of their claims(3). Greenwashing can also be identified by the dilution of the overall ESG value of a fund due to its inclusion of companies with no to low ESG values making up small portions of the fund’s holdings. Without a formalized regulatory structure for ESG investing, it is oftentimes difficult to identify greenwashing in action. However, there are many ways of discovering the true value of an ESG fund and of ensuring it aligns with the investor’s values.
The conscientious investor must be active in evaluating companies that claim to have ESG standards to ensure they do, if fact, match their values. Many investors are surprised to find oil and gas companies in their ESG fund, for example. If there are industries an investor wants to avoid, verify those companies fall under the exclusions of an ESG fund’s holdings. Lists of company ESG ratings (out of 100) are also published regularly by ESG research firms. A great place to start is by searching a company or fund’s prospectus. Digging into a company’s annual reports, CSR standards, and board structure, depending on what standards are of greatest value, is sometimes the best way to ensure investment funds do the good that is intended. In order to avoid greenwashing, one must get in the weeds.
The TrueShares ESG Active Opportunities Fund (ECOZ) invests in industry leaders that have shown a willingness to champion the characteristics of ESG. With a focus on low carbon footprint, ECOZ seeks a portfolio with substantially lower greenhouse gas intensity than the leading ESG ETFs, and aims for less than a quarter of the S&P 500 representative emissions. ECOZ seeks to stand out against “greenwashed†ESG products by correcting several perceived problems prevalent in most ESG funds, embracing the active nature of ESG and dispelling the notion that ESG characteristics and outperformance can’t coexist.
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