What convinces savers and investors when they want to invest in a financial product? The return achieved so far? Manager’s experience? The costs involved?
Unfortunately, the answer is much simpler and does not reflect well on consumers: It is the name of the product. As soon as something says “sustainability” on it, it runs like butter. At least that’s what a recent analysis by the rating agency Morningstar shows.
She examined 975 investment funds that had been converted in recent years: normal funds became so-called ESG funds – the acronym stands for Environment, Social, Governance, i.e. environment, social issues, corporate management.
To get the label, the funds must exclude those companies that perform particularly poorly on these criteria. And that’s enough: According to Morningstar, the funds examined recorded average net outflows in the twelve months before the renaming. Inflows in the nine months thereafter.
ESG seems to work splendidly as a marketing tool. But does it do anything? Does it help the environment, with occupational safety, with the fight against corruption? There is now overwhelming evidence that investing in such ESG funds has no effect.
If you really want to change something with your investment, you have to take a different approach. But these are complicated and difficult. In the USA, some big names are therefore already saying goodbye to the hyped form of investment.
“Unfortunately without real world impact”
Why ESG funds don’t deliver on their promises is quite simple. Investment funds, ETFs or private small investors invest in companies via the stock exchange. “For a deal to come about, there needs to be a seller who sells a stock position and a buyer who wants to buy it at the market price quoted,” says Thierry Feltgen, head of sustainability strategy at fund manager BLI.
The decisive factor: This transaction has no effect whatsoever on the company, in most cases it is not even aware of it at all. Above all, however, capital is neither supplied nor withdrawn from it.
Feltgen says that anyone who avoids individual stocks or excludes them from a fund because they do not meet certain sustainability criteria will at best get a reassuring feeling. “Unfortunately, without real-world impact.”
This criticism of the entire ESG hype that has gripped the financial world for several years is not new. However, until now it has only been limited to a few lone callers. For the majority of financial market participants, the prospect of good business prevailed: the procurement of ESG-relevant data, its analysis, processing and implementation is a reliable source of revenue for hundreds of companies in Europe.
The business of sustainability in the investment industry now employs tens of thousands of analysts, lawyers and product managers. They make good money and investors are snatching the sustainable financial products out of their hands. Even if everything is just an expensive show, without any benefit.
But recently there are more and more voices that question all of this, especially from science. Jacquelyn Pless of MIT’s Sloan School of Management in Cambridge recently concluded in a study that excluding “dirty” companies from investment strategies has little, if any, impact on those firms.
An effective tool for change
They could not be persuaded to change their business policy as a result. Many other studies that scientists have done on the subject came to the same conclusion, be it at the University of Zuricham Ifo-Institute or at the Goethe University in Frankfurt.
Nevertheless, there is an effective tool to bring about changes in companies, Pless writes in her analysis: an investment in these companies – exactly the opposite of what the ESG funds do. “Investors can direct innovation and business activity by governing with their ‘voice,'” she says. “On the other hand, if they sell their shares, they lose their seat at the table.”
“Investor engagement, i.e. the dialogue between investors and companies, offers the best chance of success in getting a company to become more sustainable,” agrees Thierry Feltgen. However, a company will hardly listen to a single shareholder. “Not even if he’s a big institutional investor,” he says. And that’s the problem with this strategy.
It is true that nowadays investors can get together via various platforms, represent their interests together and pool voting rights. But all this is time-consuming and tedious.
It also requires thorough preparation and familiarization with the topics, often special knowledge. In any case, this is more laborious than simply sorting out supposedly “dirty” stocks, but at the same time it is the only way to change something.
Ultimately, however, there is also the question of whether it is really so desirable for investors to influence the business decisions of companies in this way. Imagine if these had brought about really decisive changes in the past few years – then there would probably be no more defense companies in Europe and the USA today, as they are also excluded from most sustainable investment vehicles.
Vanguard’s retreat
Since Russia’s attack on Ukraine, however, most people should be happy that these companies still exist. And the coal-fired power plants that are currently replacing the missing gas in Germany would then no longer exist.
In the USA, Vanguard, one of the world‘s largest investment companies, recently withdrew from the so-called Net Zero Asset Managers Initiative, an alliance of the financial industry with the aim of helping to achieve climate goals.
It’s not Vanguard’s job to dictate strategy to companies, said Tim Buckley, head of the investment giant, defending the decision. “It would be presumptuous to assume that we know the right strategy for the thousands of companies that Vanguard invests in.”
Above all, however, it is not the task of investors to support or promote political goals. “Politicians and regulators have a key role to play in setting the ground rules for a just transition to a lower-carbon economy,” he said.
The democratically elected politicians are responsible for achieving the climate goals. Vanguard is only there to generate returns.
Of course, these statements are also an attempt to escape political pressure from radical Republicans in the USA, who are currently campaigning against ESG and in particular want to prohibit state investors, such as pension funds, from taking such criteria into account. Behind this, in turn, is the fundamental denial of man-made climate change.
Nonetheless, Buckley has a point: If ESG does nothing to achieve the desired goals, why bother and spend all the effort to integrate ESG criteria into the investment processes?
Especially since 2022 brought a clear advantage for all those who ignored ESG: On average, they achieved significantly higher returns.
“Everything on shares” is the daily stock exchange shot from the WELT business editorial team. Every morning from 5 a.m. with the financial journalists from WELT. For stock market experts and beginners. Subscribe to the podcast at Spotify, Apple Podcast, Amazon Music and Deezer. Or directly by RSS-Feed.