Truth in ESG
Global risks are rising every day. Energy and food insecurity seem to be atop everyone’s macro agenda. What caused this? How did we get here?
Environmental, Social, and Governance (ESG) investing is the biggest investment force on Wall Street over the past decade. ESG combines social and emotional appeal to investing by corralling investor capital towards theoretically sustainable and societally beneficial companies. ESG at its heart imposes capital constraints on industry. ESG is fraught with negative risk implications and as a result, far from an investing panacea.
Constraints on capital starve certain industries of inflows while misallocating funds and driving malinvestment to others. Often ulterior motives laced with conflicts of interest cause risks to accumulate and reach untenable levels.
Fossil fuel and nuclear energy have been starved of ESG investment dollars by these constraints, creating imbalances and distortions in risk while upending the global macro landscape. Russia’s Ukraine offensive was facilitated by Germany shutting down their nuclear facilities. The energy imbalances expedited Russia’s power grab. Macro risks have skyrocketed.
EC President von der Leyen recently said, “Russia is blackmailing the EU over energy.” Was anyone surprised by this? Russia’s action ruined the ESG investment scheme as reality usurped emotional appeal. ESG investing must change dramatically.
The ESG investing movement is the greatest bubble of the past decade and the leading cause of constraints on capital across the investing spectrum.
How it Evolved
The original concept of Socially Responsible Investing morphed into ESG. Eventually ESG was captured by Wall Street. It is now an unrecognizable theme hidden behind a money-making machine. ESG is a cottage industry. Assets are in the trillions. Revenues and fees are in the billions. Wall Street wants to collect ESG coupons in perpetuity.
This is not new. Wall Street has done this in the past. Recall CDOs during the GFC. The junk bond and mortgage bond explosions of the 1980s had similar effects. In the end, investors pay high fees and get weak returns while market risk explodes.
Where is it Now?
Everyone is feeling the inflation pinch at the gas station and the grocery store. Energy/food insecurity is on the rise. Civil unrest erupting all over the world. This will continue.
Amazon has the world’s biggest carbon footprint yet, appears in 80% of “ESG” funds. Coke/Pepsi are leading contributors to Type 2 diabetes and obesity while producing millions of plastic water bottles, failing miserably in ESG’s “S” and “E.” Yet KO/PEP appear in more than 70% of “ESG” funds, including the #2 and #3 holdings respectively in Nuveen’s Large Cap Value ESG ETF.
Investors are being misled. Nobody knows what they own. Many “ESG” funds own some of the worst ESG contributors. Risks are soaring as investors say one thing and do another with respect to ESG. Worse yet, vital industries are being starved of funds, exacerbating global imbalances and heightening security risks.
Investor Action
Buying ESG funds is different from being ESG-friendly. We are not anti-ESG. 99% of plastic bottles have been eliminated in my house. We use S’well bottles and Hydroflasks. We grow our own vegetables. In June, my son was in Peru planting saplings in indigenous villages. Diversity is paramount in incorporating various angles and viewpoints to find robust solutions. We practice ESG locally.
Practicing ESG and imposing ESG practices via imposed investing capital constraints are incongruous. Doing good, feeling good versus saying you’re doing good are part of the ESG investing ruse. NYU Finance Professor Aswath Damodaran is critical of ESG in highlighting “Saying good versus doing good.” https://aswathdamodaran.blogspot.com/2020/09/sounding-good-or-doing-good-skeptical.html He was a guiderail for our ESG investigation.
ESG investors have been captured by Wall Street and paid exorbitant fees while achieving few, if any, ESG objectives.
How to Manage Risk
We created the ESG Orphans Index and $ORFN to help investors manage ESG risk. We grouped ESG investing’s only consistency, the exclusions, to comprise our “ESG Orphans.”
The orphaned sectors are fossil fuel, nuclear energy, weapons, alcohol, tobacco, and gambling. The “Orphans” and $ORFN help investors focus on risk management and capital appreciation opportunities separated from ESG’s emotional appeal. We aim to steward money with a primary goal of fiduciary responsibility. It’s straight forward, without conflicts of interest or hidden motives. We strive to keep money separate from emotion.
Cliff Asness discusses the high-expected return nature of ESG Orphans here: https://www.aqr.com/Insights/Perspectives/Virtue-is-its-Own-Reward-Or-One-Mans-Ceiling-is-Another-Mans-Floor%20%20. “Lower returns are an ancillary consequence of ESG investing.” Wall Street pushes an ESG false narrative, misrepresenting returns and benefits, while failing to achieve objectives.
The tailwinds behind the ESG Orphans will increase as political reality usurps ESG hopes and dreams. Our basket of high-expected return securities can help investors mitigate excess ESG risk in portfolios both at a micro and macro level. In addition, it can help capitalize on and protect from the coming unwind of the ESG bubble which has reached untenable proportions.
ESG’s capital constraints created massive risks in the market. We designed the ESG Orphans and $ORFN to help investors manage risk and maximize returns while keeping investment returns separate from emotion and virtue. This product will help protect investors against the biggest risk in the markets currently: ESG.
