EGS: Up In Smoke

   How do you know which ETF to buy?

   With so many options out there, many people are centering their investment decisions on their own core values. This can be seen with the rapidly increasing popularity of ESG funds. 

What is an ESG Fund?

   ESG stands for Environmental, Social, and Governance, which roughly means that the companies selected to be held in the ETF abide by certain constraints. This could be minimal environmental emissions, or good labour relations. Simply put, these funds put your money where your heart is - protecting this world and all that's good in it.

   With climate change concerns, a slew of labour disputes, or corporate scandals rocking the foundations of capitalism, it's no wonder that ESG funds have surged in popularity in recent years.

   But all that glitters isn't gold. Or green in this case.

Europe, The Leading Edge

   With trillions of dollars invested through these funds, it's no wonder that companies are marketing about their green initiatives, their social justice programs, and their strict governance protocols. Unfortunately, as we can see in Europe, many of those marketing efforts are more about blowing smoke than actually following through on those lofty promises.

   After growing by more than 2 trillion dollars from 2016 to 2018, European ESG funds fell under some scrutiny. The subsequent restrictions looked at the 2015 Paris Climate Accords for guidance. What does constitute "green", or environmentally friendly activities. Following the tightening of the ESG definition, money invested in Europe's ESG funds shrunk to 2016 levels, a decline of over 2 trillion dollars.

   Meanwhile, in markets without such strict definitions, the amount of funds in marketed ESG funds skyrocketed, jumping by more than 5 trillion dollars from 2018 to 2020 in the US.

   While that doesn't mean that ESG funds are bad, it does seem to indicate that ESG is now more of a marketing ploy than a real business decision. If, or rather, when regulators do crack down on skirting on the edge of ESG regulations, we should expect that many funds will lose that ESG badge.

Blowing Smoke

   How do you know if your favorite company is actually a bad guy?

   That is exactly what European regulators hoped to uncover, and now the SEC has its eyes set on the US markets. What they are trying to prevent is a practice called “greenwashing”. 

   Greenwashing is where a company, through its marketing and PR efforts, deliberately mislead the public about the environmental impact of their business activities. While the examples are widespread, such as downplaying the waste caused by clothing production, the reasons are clear. There is really no way of protecting the public, by law, from the buzz words used by marketers.

   Words like “sustainable”, or “green”, have no legal definition.

   If you truly are trying to invest in an ESG company, you’ll need to research that company’s environmental activities, and uncover if there are actual results behind the PR claims. This of course is exponentially harder when looking at an ETF that invests in dozens of companies at once.

   Environmental, social, and corporate governance concerns will continue to shape how businesses operate. This bodes well for investing in companies whose practices you resonate and agree with. As the ESG movement continues to pick up steam, expect some of the posers to be caught and kicked out of this exclusive club.