What is greenwashing and why does it matter?

"ESG" is an acronym that stands for "environmental, social, and governance." Many of us have heard of it. On Wall Street, it's becoming more common for financial products to be called "ESG" or for companies to do more "ESG" work to improve their scores and raise their stock prices. But ESG is a very large and broad term. Too many traditional Wall Street firms have used it as a way to market or package existing financial products without actually moving the needle on environmental goals.

Not doing what their name says

Too many ESG funds say they want to change the world but don't do what they say they will do. The Financial Times said that up to a third of exchange-traded funds (ETFs) with a focus on climate change held oil and gas stocks. Another example is the Vegan ETF, which tries to prevent cruelty to animals. It is mostly made up of fast-growing tech companies, and the fact that companies like Google still serve animal products in their cafeterias is ignored or worked around. At best, many of these funds are not perfect because they don't always "screen out" companies that go against what they say they stand for. At worst, many of these funds are just blatant attempts to make traditional financial products look more "green."

Not giving you a voice

Many asset managers, even those who run ESG funds, don't use their power well. In fact, research from MIT shows that this problem is all over Wall Street. 82% to 88% of the market capitalization of the S&P 500 is owned by fund managers like BlackRock, Vanguard, and State Street. This gives them a lot of power. Because they have given their ETF shares to short sellers, they don't often get to vote at annual shareholder meetings. When they keep their shares and vote, they use their power to support management up to a whopping 93% of the time.

Careful about what you ask for

Even if everything goes well, ESG funds that try to get rid of "bad" companies from their portfolios might not make a difference and might even hurt.

First, ESG funds that do a good job of weeding out "bad" companies, however "bad" is defined, lose the ability to have an effect on the "good" companies that remain. If you leave the company, you won't be able to vote out stubborn board members or bring in resolutions to make the company better from the inside.

Second, just like in physics, every action has an equal and opposite reaction. When ESG funds don't buy shares in companies that pollute, like coal mines or oil refineries, the share prices of those companies may go down, but their valuations become more attractive. Because of this, other buyers fill the void. Bloomberg reported, for example, in January 2022 that private equity firms were lining up to buy low-priced shares of coal mines, in part because ESG funds had turned away from them. This raises a question about strategy: Does it make a difference if all of this ESG investing just changes who owns "bad" or polluting companies from one fund manager to another? Has really anything changed?

Third, if everything else stays the same, when investors put more money into "good" companies, the returns they can expect from those companies must go down. This is what the Wall Street Journal said:

One of the most important rules of investing is that the price at which you buy something is important. This is clear with bonds because the yield is based on how much you paid for the bond. In stocks, it should be clear, but many people don't pay attention. Even if a business is doomed and has only a few years left, its stock could be a great investment if it is even cheaper than the numbers suggest. At the same time, a great company that is growing quickly and has a rock-solid business model will be a terrible investment if the price is wrong.

Investors who stick to an avoidance strategy may pay a price in the long run, both in terms of higher fees from marked-up ESG funds and lower overall returns.

How 15Rock fits in

The way 15Rock does things answers all of these complaints about greenwashing and ESG investing in general. 15Rock lets clients vote with their money by modelling the risks in a way that can't be "greenwashed" without fraud on their side.

We also connect companies with solutions that have been carefully screened, so you can "vote with your dollar" and spend it on the things that are most important to you.