ESG funds: Greenwashing Wall Street

Can money be pure?

Stacks of $100 bills fill the frame
Photo: Lee Jae Won (Reuters)

Can money be pure?

Investing according to environmental, social, and governance (ESG) principles was supposed to make companies act more responsibly without needing to get the government involved.

A fund’s ESG principles, on the surface, don’t seem to affect trading patterns. Stocks, regardless of high or low ESG standards, have about the same returns on average, whether you’re talking individual securities or making a fund-to-fund comparison.


This pattern generates headlines about how investors can do good while still making money. However, it overlooks a crucial reality: ESG funds could merely allow asset managers to accumulate investors’ money and collect fees, without increasing the financial burden for resource-hungry companies with large carbon footprints.

Fund managers might also be manipulating their portfolios to create the illusion that ESG investments are more lucrative. A recent study (pdf) from the National Bureau of Economic Research found that those who manage both ESG and non-ESG funds tend to make sure that their ESG funds perform better. That’s because, as it turns out, ESG investors are more sensitive to performance than non-ESG investors.


Can capital redeem its own sins? Let’s find out.

By the digits

74: Companies from the S&P 500 that mentioned ESG on their earnings calls in the second quarter of 2023

11: Percentage points by which the average mutual fund and exchange-traded fund (ETF) in Morningstar’s “Sustainable Investment” and “Renewal Energy” beat the S&P 500 from 2017 to 2020

$4 million: Fine levied by the US Securities and Exchange Commission (SEC) against Goldman Sachs when it didn’t have the proper procedures written out for ESG research on one of its products


$300 million to $500 million: Additional interest that Texas will have to pay because it banned ESG-friendly bond buyers from underwriting municipal bonds

50: Investigators who raided the offices of DWS—Deutsche Bank’s investment arm—while investigating the bank for greenwashing


Explain it like I’m 5

What are ESG funds?

Environmental, social, and corporate governance (ESG) investing is an attempt to raise the cost of capital for companies that behave unethically. The list of issues that ESG aims to make right is vast: Carbon emissions, deforestation, water management, data security, human rights, executive pay, large-scale lawsuits, board diversity, and more.


Cramming so many issues into one financial product likely makes ESG less effective, but ESG rating firms can choose to score companies on single issues, a range of issues that fall under one bucket (governance issues alone, say), or with general ESG scores that incorporate all three parts of the investing principle.

The most controversial and important part of ESG is the part that focuses on the climate. Capital is primarily responsible for man-made climate change, and the hope of ESG investing—also known as sustainable investing—is that capital might be able to fix what it broke, and continues to break.


Whether or not ESG actually contributes to saving the planet is debatable. Meanwhile, corporations are able to use ESG to improve their brand reputation and keep lawmakers off their backs.

The investing trend is also declining. The amount of assets invested in ESG funds fell by $163.2 billion globally in the first quarter of 2023, year-over-year. Executives that want to enjoy a spot outside of the political limelight may be giving up on the term ESG, with BlackRock CEO Larry Fink instead choosing to focus on the term “decarbonization.”



“These findings cast doubt on the hope that self-regulation would suffice to undertake a green transition. Firms seem very responsive to the public mood in words and programs. Better outcomes? Not yet!”


—Luigi Zingales, finance professor at the University of Chicago Booth School of Business, writing in a shareholder value study

Brief history

The takedown of shareholder value

Researchers at the University of Chicago studied the annual letters of America’s largest companies over 65 years and found that mentions of “shareholder value” have been trending downward since peaking in 2010.


This is in large part because companies that placed a heavy emphasis on shareholder value in annual letters didn’t do any better than those that didn’t, the researchers noted. It’s also because several companies now recognize that the endless pursuit of profit has exacerbated some of the world’s most critical problems, such as climate change and social inequality.

The number of ESG mentions in annual shareholder letters didn’t correlate to fewer fines for ESG non-compliance, the researchers found. Even while companies are trying to do better, it turns out they are pretty bad at self-regulation, and only a very tiny fraction of executive pay is linked to ESG goal performance.


Pop quiz

Gif: Giphy

How much extra are Texas residents paying per year for homeowners insurance because of climate change risks?

A. $0

B. $1,040

C. $1,170

D. $2,100

The answer can be found at the bottom of this email, along with our portfolio values.


Take me down this 🐰 hole!

The final nail in the coffin: Asset managers

Support for ESG overall in the investor community is waning, according to an analysis by ShareAction, a UK campaigning group. Some of the world’s largest asset managers voted against ESG shareholder resolutions more often in 2022 than they did the year before. Not all of them did worse in ShareAction’s methodology, with some like French-based BNP Paribas Asset Management voting for 99% of proposed ESG shareholder resolutions. (Managers of investment vehicles, such as mutual funds and pension funds, often vote in shareholder meetings on behalf of the securities they hold.)


Moreover, because of the differences in agreement that asset managers have over what belongs in the ESG bucket and what doesn’t, ESG ETFs barely have a carbon output lower than the S&P 500, according to a 2021 analysis by Jordan Waldrep, chief investment officer of Illinois-based TrueMark Investments. Many of these funds still include major emitters like ExxonMobil.

This is in part because asset managers aren’t paying that much attention to each company’s carbon output, and the agencies that provide the ESG scores, used to form these portfolios, often employ a deceptive analysis of corporate data. They tend to prioritize understanding how a company might be impacted by climate change, rather than how the company’s actions could contribute to climate change, according to a 2021 Bloomberg report.


Watch this!

MSCI, the biggest ESG rating firm, does not even attempt to evaluate the influence of a company on the climate. Its primary focus is on whether climate change could potentially disrupt a corporation’s profitability. Watch Bloomberg’s quicktake, “ESG Ratings Are Not What They Seem.”



Did you invest in ESG funds this year?

Gif: Giphy
  • Yes, I put money into an ESG fund
  • No, I didn’t put any money into an ESG fund
  • No, I pulled money out of an ESG fund and put money into a non-ESG fund

Invest your time in our poll, the returns are ephemeral but infinite.

💬 Let’s talk!

In our last poll about potash, 50% of you said you touch dirt daily, 32% said weekly, nearly 7% monthly, and about 11% of you said you rarely commune with the earth.


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🤔 What did you think of today’s email?

💡 What should we obsess over next?

Today’s email was written by Nate DiCamillo (trying to clean up his act) and edited and produced by Annaliese Griffin (going hard on the bond market).


The correct answer to the quiz is C. $1,170 Even as right wing states have been banning asset managers that recognize the cost of climate change, insurance firms continue to factor in the future effects of climate change in sensitive states like Texas when offering insurance products.