By Thom Rindahl, CFP
I like ESG (Environmental, Social, and Governance) investing. It makes me feel fortunate that I am assisting others in reducing their harmful effects on the environment, or even making a positive environmental impact, do right by society, and run their businesses in a manner that is beneficial for shareholders and stakeholders alike. Wouldnt that result in a better bottom line?
Why, therefore, am I not interested in ESG financing?
There are certainly plenty of great ESG funds to choose from. However, every fund company has a slew of funds to offer. They try to ensure that a fund receives a full allocation mix when a fund covers certain issues but not others. Or they cover too many obstacles (some of which may not be important to you). This can conflate whether your portfolio is truly ESG.
Solar energy, wind energy, recycling, carbon capturing, clean coal, fossil fuels, firearms, tobacco, alcohol, gambling, transportation, food/nutrition science, prisons, GMOs, nuclear power, nuclear weapons, employment practices, community responsibility, diversity in leadership, etc.
It''s important to remember that if you don''t want to be in x, an ESG fund will not have it in the portfolio. If the metrics align, then x might fit into the portfolio.
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Have you heard of greenwashing? The main offenders are index funds monitoring the main indexes. By design, they will be subjected to a little bit of everything ESG or not.
If you do not want to profit from certain areas of business or industries due to social, moral, or faith-based beliefs, you may go old school with funds that are actively managed and focused on SRI and MRI (socially responsible investing and morally responsible investing) or an individual stock. So, you may also look for more of a non-name brand index in the portfolio, such as Big Oil. For example, if the ESG fund is monitoring a specific clean energy index, you will not see Big Oil in the portfolio
It may be a better idea to adopt an approach more similar to that of activist investors. Instead of trying to find those firms that have the most ESG metrics checked (whatever that means), we just require businesses to do better. Because at the end of the day, isnt that what we want? Not only for individuals, but for everyone of us to do better.
About the author: Thomas Rindahl
Thomas Rindahl, PhD, MBA, CLU, CFP, LUTCF, BFATM, is a financial advisor in Tempe, Arizona, who has provided comprehensive financial planning to his clients for over 20 years.
Securities offered through Securities America, Inc., Member FINRA/SIPC. Advisory services offered through PFG Advisors. TruWest Wealth Management Services, TruWest Credit Union, Securities America, and PFG Advisors are separate entities. Securities, insurance, and advisory offered by Securities America, Inc., and their affiliates are: not NCUA insured. No credit union guarantee. Not credit union deposits or obligations.
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