Dissatisfaction with ESG

A top-five question I hear, whenever I help someone get started investing, is “Can I do socially responsible investing with my retirement funds?”
Inevitably, my answer disappoints: “Nope!”

A booming category, but mostly disappointing

At the beginning of the third decade of the third millennium, we still have no good way of both earning a solid “return on markets” through stocks, while simultaneously feeling good about our social consciences.

I’m not saying that because it’s a bad idea, necessarily, to accept a lower return on our investments in favor of living our values. That’s fine, very cool, it’s something we should aspire to. I have no problem with being willing to accept a lower return in order to sleep well at night, for any number of reasons. Some will even argue that sustainable investing should provide a higher return in the long run, which is a fine thing to believe, if slightly less plausible. 

I’m also not saying that Wall Street is unable to provide a set of products to satisfy this wish for socially responsible investing. 

On the contrary, starting a decade or two ago, Wall Street seemed to be on a solid path to providing that option for people who want to invest according to their moral values. The mutual fund category known as ESG – for Environmental, Social, and Governance – allows an easy way to identify companies that pledge to do good in the world. That category is in fact booming, following record year to date inflows to the tune of $17.6 billion through November 2019, more than triple previous annual amounts.

What I am saying instead is that it seems to me this type of investing – as currently available through the ESG filter – is extremely dissatisfying, at least for the people typically asking me this question.

Dissatisfaction starts with one important complication: If you put 5 social justice warriors in a room in front of a Bloomberg terminal, they will very likely not agree on what constitutes a socially conscious investment. 

Should we eliminate weapons manufacturers, casinos, alcohol brands and tobacco purveyors? Those seem at first relatively easy to agree on. But reasonable people could disagree on whether guns and gambling are good fun, while smoking and drinking are sinful. Or vice versa.

Those are all examples of ‘negative filters,’ in the sense that a mutual fund manager could filter out any company that is involved in a forbidden industry. Eliminate a bunch of industries and there are still many left over for investing.

A separate socially-aware method would be to attempt to invest in ‘positive’ filters, such as a company that tries to promote labor safety, or one that practices corporate board diversity. If those are your priorities, it is somewhat possible to find this through the ESG filter.

Still others would find it nice to be able to select positively for companies earning profits from fair trade, renewable energy, or manufacturing bioplastics, to crowd out industries considered less good for the planet or for people. We want that ‘positive’ filter approach to social investing to exist, although it is harder to find because it tends to be done on a small scale only.

At a future, later, stage of our late-stage capitalist system, these alternate strategies and disagreements in approach will matter more. 

But here’s the grim reality of where ESG is now. The billions flowing into ESG funds are going to not-very-inspiring investments. The reality falls far short of where I think social justice folks imagine it should be or that it is.

One investment firm early in the socially responsible investing space, Calvert Research and Management, boasts high rankings for its ESG-influenced approach. The top 10 holdings of their flagship Calvert Equity Fund are lovely companies that I admire and am a customer of. You’ll recognize brands like Visa, Mastercard, Dollar General, Alphabet (aka Google), and Microsoft in their top 10. But it doesn’t feel like I’m exactly saving the planet when I invest in worldwide leaders in credit card, low-end retail, and software companies.

It isn’t easy being green

Over at Vanguard’s FTSE Social Index Fund – “screened based on social criteria such as workplace issues, environmental issues, product safety, human rights, and corporate responsibility” –  here are the top ten holdings, in order of size: Apple, Microsoft, Alphabet, Facebook, JPMorganChase, Johnson & Johnson, Visa, Proctor & Gamble, Bank of America, and Walt Disney. Again – great companies – I’ve been a customer of all of them at some time or another. But my sense is that these are not exactly appealing recipients of the capital of social justice warriors worldwide.

Search for top ESG companies and the lists are always like this: Great, profitable corporations that operate far from the fuzzy feeling I might think I’m getting from “socially responsible” investing. 

In my most cynical moments, this feels to me a lot like greenwashing. Imagine you are in charge of a company that would like to attract the investment capital of ESG mutual funds. So you hire a Chief Equity Officer, or Chief Compliance Officer, and now you can be considered good enough to satisfy the ESG screen of many mutual fund companies. For a few hundred thousand dollars in salary you qualify to attract billions in capital. It’s an easy decision. 

I am not the only one who finds this situation somewhat unsatisfactory. The Wall Street Journal reports that The US Securities and Exchange Commission recently began in inquiry into ESG funds.

The gist of the SEC’s inquiry is to verify whether fund criteria for investing and voting is consistent with stated ESG principles, while at the same time acknowledging that ESG principles are poorly defined. 

The SEC Commissioner Hester Pierce is quoted on record saying that:

“While financial reporting benefits from uniform standards developed over centuries, many ESG factors rely on research that is far from settled.” On another occasion, she has said about ESG: “I think that should be part of the discussion, trying to figure out to what extent ESG might stand for ‘enabling stakeholder graft.’ “

I think socially responsible investing is a worthy goal, but the means as of now are pretty unsatisfactory, at least through public company investing.

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Not A Fan Of Socially Responsible Funds

A version of this post ran in the San Antonio Express News.

I want to be wealthier. I also want to be a good person.

A friend – someone who also wants these two things – recently asked if I could recommend a good, reasonable-cost, ‘socially responsible’ mutual fund.

My answer: Nope. I can’t.

Greatest of All Time (and I will not argue this)
Greatest of All Time (and I will not argue this)

Now, I know this makes me a 42-year old Grumpy Cat of the investment world. Also, while I’m not a fan of socially responsible mutual funds, I respect people who disagree with me on this topic.

Unlike some topics – (Greatest Of All Time status in their respective categories go to Tom Brady, The Wire, and Rihanna, and I will not argue this) – I’m not hopelessly dogmatic about socially responsible investing.

However, I’d like to make the case against socially responsible mutual funds because of:

  1. Costs
  2. Endlessly arguable selection criteria
  3. Lower returns
  4. There’s a better way to be wealthier and a good person.

I’ll take these one at a time.


Most socially responsible mutual funds – not all, but most – charge above-average management fees when compared to other actively managed mutual funds. This makes sense partly because of the additional layer of ‘screening’ or selection that a socially responsible manager theoretically does.

This also makes sense because an investor in socially responsible funds has already agreed – silently, implicitly – to the idea that she’ll buy a premium product at higher costs because it suits her values.

My analogy here is to the buyer of an organic or farmer’s market tomato: The buyer agrees to pay $4.50 for a tomato, because those big, red, tasteless $0.75 things are an abomination. In the case of tomatoes, I get it.

In the case of mutual funds – as an ardent index fund believer – it’s really hard for me to endorse 1.25% fees rather than the 0.25% fees of an equity index fund.

Selection Criteria

Fine, call me Grumpy Cat, but I just don’t know how to get precisely the values I want when I buy public company stocks.

I know this whole post makes me a Grumpy Cat

Socially responsible filters vary widely by fund, but many apply both an ‘eliminate the negative’ and ‘accentuate the positive’ filter to their stock selection.

Can you avoid the ‘negative’ companies in industries you oppose? Like…

Oil and gas drillers and refiners? (Exxon)

Saturated fat pushers? (McDonalds)

Gun manufacturers? (Smith & Wesson)[1]

High-fructose corn syrup dealers?  (Coca Cola)

Tobacco companies? (Philip Morris)

Beer producers? (Anheuser-Busch)

Weapons manufacturers (Lockheed Martin)

Subprime mortgage CDO structurers? (Goldman Sachs)

Casinos? (Las Vegas Sands)

Union-busting retailers (Wal-mart) or offshoring manufacturers (Apple) that don’t care to pay workers a living wage?

Incidentally, those companies above represent some of the most successful stocks of all time.

Those are the easy ones to eliminate, I suppose, but where do I draw the line? Am I ok with plastic bag manufacturers? Styrofoam cup producers? Battery makers? Animal-testing pharmaceutical companies? When I looked at the portfolios of social responsible mutual funds, many of the companies above filled their portfolios. It all depends on what one deems ‘socially responsible,’ which can vary widely from fund to fund, and individual to individual.

If I kept applying filters like this, I’m afraid my universe of acceptable companies shrinks almost to zero.

On the other hand, would it be possible to only invest in ‘positive’ companies?

Companies engaged in sustainable energy manufacturing? Sustainable agriculture? Microcredit lenders?

The list of public companies truly engaged in only, pure, ‘positive’ activity, untainted by greed and potential harm is pretty slim. Unless you are willing to be fooled by green-washing.[2]

Overall, though, what’s my problem? My big problem is that mutual fund investing would be an extremely blunt, imprecise expression of my values. Do I really trust that the mutual fund managers can engage in ‘positive’ investing while eliminating the ‘negative’? According to me?

No, I really don’t.

Of course I could invest in individual companies, but that would violate other investment rules of mine, regarding individual stock picking.

Lower returns

In addition, am I willing to receive a lower return on my money by filtering out all of the companies in certain industries? Especially some of the spectacularly profitable ones listed above?

Implicitly, I think most socially responsible investors would say they are willing to receive a lower return on their money as a result of their selection criteria.

For the most part, I’m unwilling to do that.

Is there a better way?

My own preference is to try to make the most money I can through ordinary – in my case, index – investing. I own none of those companies I named above directly but I’m pretty sure they’re all tucked away in my retirement account through a broad market index I own.

With more money in my account – admittedly made from investments in companies engaged in the broadest range of moral, immoral, and amoral activities – I’ve got more money available for expressing my personal values.

When I give money philanthropically, I much more precisely express my values with a philanthropic contribution. I’m not willing to give up money – through fees and underperformance – that would leave me with less to contribute philanthropically.

At least, that’s what I tell myself, when I want to be both wealthier and feel like a good person.


Starbucks, you are a greenwashing drug dealer. (And I love you!)


[1] I recommend this New York Times’ article on socially responsible investing, highlighting the profitability of gun-manufacturing stock Smith & Wesson and the ‘greed v. values’ dilemma this creates for people opposed to investing in gun makers.

[2] Oh, what’s green-washing? When a rapacious capitalistic conglomerate posts pictures of happy Guatemalan coffee pickers smiling in their huipiles, so that I go ahead and buy their product every morning at the drive-through partly because I’m a hopeless addict and partly because I’m mistakenly comforted in the belief that I’m buying a “fair-trade” product safely on the side of the angels – that’s me being green-washed. And also, hopelessly addicted. Damn you Starbucks! But I digress.



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Book Review of A Random Walk Down Wall Street by Burton Malkiel

The Simplest Way to Invest by Lars Kroijer

More on Actively managed vs Index funds

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