Invest Effectively

ESG & Index Funds

If you follow the financial headlines, you’ll see that ESG practices are shaking up the realm of investing. ESG stands for Environmental, Social, and Governance, and it’s all about considering sustainability and ethical factors when making investment decisions.

Of course, someone has to determine what is sustainable and ethical. That’s where the rub is. Recently, three tobacco companies were judged much higher than EV darling Tesla on the London Exchange ESG ratings, conducted by S&P Global. Twitter was one of the lowest companies scored. Responding to the curious ratings, Elon Musk said the “S” in ESG, must stand for “Satanic”.

In ESG portfolios, companies that don’t meet the desired environmental, social, or governance standards might find themselves on the financial sidelines. While this might seem like bad news, it actually opens up a unique opportunity for non-ESG investors.

Enter index funds! These funds aim to replicate the performance of an entire market index – including the ESG excluded stocks – such as the entire S&P 500. By buying into index funds, investors gain exposure to a diverse range of companies, including those that are ignored by ESG activists. This broader approach means that index fund investors can potentially benefit from the performance of companies that are not in the spotlight of ESG criteria. And, they can pay a lower ‘non-managed’ fee. It’s like having a backstage pass to the stock market.

Of course as an individual investor, it’s crucial to align your investment choices with your own values and beliefs. ESG criteria provide a framework for doing just that, but not all stocks excluded by ESG practices are unworthy investments for all people. Sometimes, companies are overlooked due to specific issues or controversies, which might not fully reflect your view of the world.

I’ve been a long-time S&P 500 index fund investor and I would be very careful before I let others decide what my investing ethics or worldview should be. I expect my judgements of industries might be very different than the the big pension funds controlled by state bureaucrats, such as the $440B CalPERS fund managers. As with anything, “let the buyer beware” of ESG funds and everything else.

How are you viewing the ESG movement?

Image Credit: MidJourneyBot AI

8 thoughts on “ESG & Index Funds”

  1. This is an excellent and very timely topic. Many index funds, which are chartered to be a low cost way of matching market gains have morphed into something else behind the scenes.

    Here is a link to a Financial Times article that describes the rise of the largest Investment House through acquisitions and offering low cost Indexed Funds and ETF’s.

    https://www.ft.com/content/7dfd1e3d-e256-4656-a96d-1204538d75cd

    Pay close attention to the parts of the article that describe the three leading index fund providers participation in ESG by voting shares which really don’t belong to them, but belong to their investors they are investing on behalf to follow an ESG agenda.

    There are multiple reasons why I prefer directly owning dividend paying shares instead:
    1) I get to vote my shares the way I want, instead of having someone else with a political agenda that doesn’t match mine, vote my shares their way. There were a couple occasions I got to actively vote for an alternate proxy that had a good outcome.
    2) My only costs are for some data services, which when amortized over the value of my holdings are less than the management fees for Index Funds and ETFs.
    3) I can cherry pick my stocks. For example, I sold woke Disney which suspended its dividend at the start of Covid-19 and is making decisions that are not winning in the marketplace. I bought Exxon and Chevron at the start of Joe Biden’s Presidency and quickly doubled my investment. I am always looking for good dividend paying businesses that are out of favor for often temporary reasons.

    The Babylon Bee just had a parody article, “Hell Celebrates Yet Another Year of Perfect ESG Scores.”

    https://babylonbee.com/news/hell-celebrates-yet-another-year-of-perfect-esg-scores

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  2. To me, ESG is first and foremost government meddling in markets, causing distortion. The cloudiness in turn creates possibilities for loss and gain of capital. We do not overweight in niches (like ESG). Through other index funds, much broader, we own sufficient parts of those companies, established and new, domestic and foreign. My 10 year guess: ESG mishmosh will not Moët’s Elia Lyman’s nor successfully. Short-term play. Not for me.

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    1. Yes – it’s a new way for governments to try to control people. Through their investments. These pol-idiots are pushed by activists to control us any way they can.

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  4. I don’t pay much attention to either ESG or index funds. A good diversified portfolio which I have which includes a decent amount of dividend paying securities (Klaus loves dividend paying securities) of quality companies has done well for me. When the market was down over 20%, my drop was half of what the market was. I also keep a percent of my portfolio in energy, yes firms that pollute because for all of the move to “clean energy”, during my and my children’s lifetimes, the world is going to burn a lot of oil and gas.

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    1. I’m an index fund guy, but maybe I should switch to buying a portfolio of dividend stocks that I manage, instead of indices.

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    2. My experience with stable dividend payers matches yours. Their values do not move in lockstep with the market. They go down less in a down market and go up less in an up market. The returns are roughly the sum of the current yield and dividend growth rate with some capital gains if you buy at a cheap price.

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