I’ve written plenty about ESG before. As a reminder, or for those newer to the blog, my stance on ESG investing is that it manipulates people who truly care about ESG goals by selling them products that don’t address what they actually care about so that fund managers can make more money charging higher fees for products that sell better than traditional funds. In simpler terms, it’s preying on the innocent!
However, there is another important issue (which I have also discussed previously) which is that what makes a company “ESG friendly” is very ambiguous. Recently, Japan’s biggest pension fund decided to re-evaluate its ESG strategy due to some of these concerns (as well as poor investment performance).
It is not like a value stock or a large cap where I know what it means. The definition of ESG is very subjective and it is very easy for people to disagree.
For proof, I decided to look at the largest ESG ETF, the ishares ESG AWARE and examined its top 30 holdings (as of 7/15). Spoiler alert: none of them are unambiguously ESG friendly. Many of them are outright anti-ESG on at least one metric. Furthermore, the top holdings look very much like a traditional actively managed growth fund.
The Top 30
The first thing to notice is the top eight holdings (including both Alphabet classes) are all tech names as are half of the top 30 which supports my prior contention that ESG performance is highly correlated to growth and momentum, rather than the ESG metrics of the companies. A good study on whether ESG actually works as an investment strategy would account for all these “factor” exposures.
But that’s not today’s topic. Let’s dive into each name and I’ll give you a short explanation of why it doesn’t belong in an ESG fund. This is not to say these companies don’t have merits too. However, their ESG qualities are mixed. (Another spoiler: Exxon is in the top 30!)
I’m sure some readers will disagree with some of the objections or remind me of distasteful practices I left out. This is not meant to be comprehensive. In some ways, that’s the point. If I can quickly rattle off disqualification issues for most ESG holdings, how much due diligence are the people who run these funds doing???
The #1 ETF holding. Yet, Apple has deep ties to China as I have previously written which bring a myriad of ethical issues. It also sources components from many poor countries which don’t have the best labor practices and requires extensive air transportation to deliver. Not to mention how much power do all those phones consume?
And where do all those lithium batteries go when Apple rolls out a new model (that, let’s be honest, we don’t really need upgrades anymore) and people junk their old phones? Environmental catastrophe!
And don’t forget building vanity headquarters on expensive California real estate when California is suffering from a lack of affordable housing!
Very similar arguments to Apple. Power consumption (especially with the cloud business!), China, etc.
Oh, man. Seriously? Amazon is the #3 holding? Where to start? You’ve got the same cloud power consumption issues as MSFT, but that’s only the tip of the iceberg.
How about all the packaging waste from delivering things to your door that you don’t really need to receive one item at a time? It is a lot more efficient to drop ship a pallet to Walmart and have you buy a bunch of single items in one trip than for the UPS man to deliver you one item each and every day. A horrible waste of gasoline, cardboard, and plastic wrap.
What else? Oh, you know all those stories about the workers being exploited! Should ESG really invest in companies who overwork their employees and put them in unsafe conditions?
Then there are the ‘market conduct” issues with Amazon Marketplace selling dangerous items and Prime knocking off products of successful independent merchants. This is an evil company that we all ignore because we like Prime, but it is anything but ESG.
Even when Amazon does try to reduce its carbon footprint, it does it through cheating by buying “carbon offsets” which is almost as big a scam as ESG investing!
#4 Alphabet (aka Google)
Alphabet is listed 4th & 6th! Why? The dual class structure, but the combined weighting is fourth, nearly equal to Amazon.
I would disqualify Google just for ignoring it’s original “don’t be evil” pledge, but we can focus instead on issues like use of personal data, turning society into screen addicts, corporate culture, and poor corporate governance.
So has any company done more to divide and polarize society than Facebook??? You can also add in its abuse of personal data, it’s suppression of speech and its horrible governance (the kingdom of Zuckerberg).
Nvidia chips are at the heart of bitcoin mining. Bitcoin mining is one of the most destructive environmental activities out there. Nvidia has no business in an ESG fund. Not to mention (as we’ll discuss later) the incredible water consumption in making semis.
Lol, you’re kidding me? Sure, the cars are electric, I get it, but….
The bitcoin ownership = strike one, the enormous consumption of rare earth minerals for the battery plant = strike two, and of course the governance debacle that is Elon = strike three. You’re out of my ESG fund.
#8 JP Morgan
They lend money to all the evil companies ESG investors hate! Guilt by association!
They issue cards to banks. Those banks provide you credit based on a credit score. We know credit scores can be discriminatory and create disparate impact.
#10 Johnson & Johnson
They create beauty through chemicals. I mean why haven’t we banned skin care products yet? Vanity above the planet? A lot of their products are sold in packaging that lives in landfills. If you believe the lawyers, many of their pharmaceuticals (and definitely the baby powder!) intentionally harm people, and they don’t give away their vaccine to poor countries around the world.
#11 Home Depot
If we were serious about trying to save the planet we’d all live in spartan homes. Instead, we go to Home Depot and buy things like air conditioners, wood for projects (e.g. cutting down trees), paint (made of chemicals), and so on.
Lots of ties to China, even casting movies to meet the demands of Chinese censors. Their push into streaming uses a ton of data and thus consumes all sorts of power (phones, cell towers, broadband pipes, etc.).
Seemingly low impact, though perhaps I have overlooked something. Those pdf files can be a lot of storage and that requires power, but that’s all I’ve got for now. They are seemingly acceptable. We may have a qualifier!
They charge full price to uninsured patients.
I guess you can say they enable e-commerce which requires consumption of power. Also, they do accept crypto now which is harmful! One of the better candidates though.
#17 Procter & Gamble
Similar to J&J, P&G uses a lot of chemicals to make their products and mostly for vanity or convenience. And of course, they make lots of those evil disposable diapers (which ironically may not be any better than cloth after all…perhaps the ESG thing to do is ban babies???)!
#18 Banc of America
See JP Morgan. They lend money to unsavory companies!
#19 Berkshire Hathaway
Berkshire is involved in pretty much every no-no. They sell dirty energy, air travel, fast food, jewelry (blood diamonds!), own a ton of Apple and bank stock, etc.
Purveyor of fat and sugar creating obesity worldwide. They also obviously consume a lot of natural resources in making their products such as water, fertilizer, etc.
#21 Coca Cola
#22 Nextera Energy
This is an interesting one. So, on one hand, they say they’re the world’s largest utility = BAD! On the other, they claim to be the world’s #1 producer of wind and solar = GOOD!
They certainly seem to have a heavy focus on reducing emissions and leading the transition to cleaner energy. For that reason, even though they do still pollute, if they are indeed a trendsetter in their industry, then they are a worthy inclusion for an ESG fund!
So we’ve got one! The question is why is it all the way down at #22???
All the other negative impacts of the internet mentioned earlier rely on Cisco’s products to keep the connection on. Think of them as aiding and abetting.
#24 Texas Instrument
They make semiconductors. Semi manufacturing uses a lot of water. It also creates a lot of wastewater. No semi maker should be in an ESG fund. Might as well own an oil company (wait, that comes soon…keep reading).
See Texas Instruments.
I thought they might pass the test, but then I came across a story about how they fail on diversity. They also buy phony carbon offsets and they did build the monstrous Salesforce Tower for a vanity project in real estate challenged San Francisco when they could have instead helped the homeless problem in the neighborhood.
#27 Exxon Mobil
All those old phones end up in the landfill. Cell towers are a blight on our neighborhoods. Cell phones are expensive and accentuate the digital divide.
Streaming is an incredibly large consumer of bandwidth and thus requires a lot of energy to produce.
They’ve sold the company’s soul to sell more soles in China.
So out of 30 names, we’ve got maybe two or three that are acceptable for an ESG fund. This is big problem!!! There have got to be 30 legit ESG plays out there that funds can own.
There should be analysts who spend all their time researching the ESG merits of a company, just like there are fundamental analysts (yeah, I know there are people who supposedly do this, but they clearly don’t take it seriously).
If investors want to support ESG friendly companies, then they should demand that investment firms actually invest in ESG friendly companies and not whatever the manager feels like buying. Until there is accountability, investment managers will continue to take advantage of investors and overcharge them for the privilege!