Greenwashing is nothing new, we’ve seen it with retail products claiming their product is made with “natural” ingredients (what is natural? And is natural always safe?) or claims that their products are certified by XYZ only to find that XYZ is a bogus initiative, so the certification is meaningless. Unfortunately, we have been seeing greenwashing move into the investment world.
ESG (Environmental/Sustainable/Governance), or SRI (Sustainable Responsible Impact) investing is also not new, but it’s a movement that is becoming massively popular. Investment companies are noticing that a growing number of investors are interested in aligning their values with their investments, so in hopes of not losing market share the proverbial bandwagon is gaining in size. It’s now such a trend that I’ve seen many companies that would otherwise not be involved in SRI or ESG practices now offer such options. I’ve been working in this market since I started my career back in 2004 and have seen how it has evolved in the marketplace. One of the most bothersome to me are the companies that offer Master Limited Partnerships (MLPs) in oil and gas now offering SRI/ESG screened options. Not only does it seem disingenuous, but I wonder how effective they are at screening out the real “bad guys”. In fact, one of the biggest retail money managers around has been caught with tobacco, alcohol, fossil-fuels, weapons and items from the human rights watch-list in their ESG funds.
One thing to know about ESG/SRI investing is that every investment has its own set of guidelines. Fund ABC might not allow for guns, nuclear weaponry or military related companies into their mix, but because they don’t have a restriction on child labor, fossil fuels or gender equality there is no reason why they couldn’t be included in the mix. This may surprise you, just like many consumers are often surprised to find the “all-natural ingredients” in their retail products aren’t always safe.
So, what do we do? Number one: go into this with a list of what you’re wanting to screen out or in. For me, I am a big environmentalist, so I would personally make sure there are no fossil fuels, no urban sprawl and perhaps include options that have alternative energies and focus on clean water. Once you have identified your objectives then rate them in terms of importance- from 1 being the absolute most important and so on. This is important because not all investments will include all the screens you’re looking for.
Next, you need to read through the investment company’s websites and fund prospectuses to see if their screens align with your values. Let’s say you’re pro-natural gas but against tobacco--you’ll often find you will have to make concessions due to many funds lumping unrelated topics together in their screening process. For instance, one of the major SRI/ESG money managers screens all their investment options of weapons and firearms, nuclear, oil, natural gas, coal and uranium mining, for-profit prisons, tobacco, alcohol, and gambling. If you’re really passionate about natural gas and not so passionate about tobacco, then you might skip this company and move on to another.
Lastly, once you’ve identified the funds you want to invest in you will now need to craft a diversified portfolio using those funds in appropriate proportions. Even the riskiest portfolios need to be diversified, so this step cannot (and should not) be skipped. A colleague of mine has likened this concept to maintaining comfortability in your home. You may not always need a furnace, nor will you always need an air conditioner or fan, but they sure are useful certain times of the year. As I write this we are in Spring with the outside air temperature in the 40s. I would feel very distraught right now if I only owned an air conditioner, but thankfully I have both an air conditioner for when it’s hot and humid and also a furnace for days like today. So not only do I need both an air conditioner and a furnace, but I have virtually no use for two of either of them. As in, once I own a furnace there’s virtually no additional need for another furnace. Even if it’s a fantastic, state-of-the-art furnace. I only need one good one. That should hold true for your investments as well. You don’t need duplicates of anything, instead you need just one good representation of each item needed.
This can get very complicated and perhaps even stressful and overwhelming. I understand that. There are many rabbit-holes I could find myself crawling into that maybe interest me but are not good use of my time. If you find yourself in this place, or maybe you’ve just simply got an interest and no desire to do the work yourself, then you need to find a professional. One that is skilled and proficient in this area. Not someone who dabbles or says they can do this for you because they have software that can help them sort through the marketplace. You might also look for an advisor that has the CSRICTM designation- Chartered SRI Counselor, which shows they are serious about this market and have thoroughly studied it. To do this you can search this national directory https://cffpdesignations.com/Designee.
As you can see, if you’re not careful you could succumb your portfolio to greenwashing and be supporting industries that you are not okay with. But you don’t have to be wrapped up in that to play in this game, that I can assure you.