ESG Investments, Trick or Treat?
Two facts that cannot be denied are: (1) we need to be better stewards of our planet, and (2) all peoples deserve to be treated and represented equally. A niche market was developed in response to these critical needs – ESG investments.
“ESG” stands for Environment, Social, and Corporate Governance. ESG investing is the practice of considering ESG factors in financial analysis and investing in responsible companies. This is
similar to biblically responsible investing, which considers which companies align with one’s faith. ESG investing has seen substantial growth in recent years. These products come in the form of mutual funds, exchange-traded funds (ETFs), annuities, and individual stocks and bonds. It sounds like an easy way to do your part to make the world a better place, but before you treat your portfolio to an ESG allocation, let’s walk through some considerations to make sure you’re not getting tricked.
First and foremost, the financial services industry is just that – an industry. As with any industry, salespeople have incentives for promoting specific products. If your advisor is pitching ESG or biblically based investment products, the first question you should ask is, what do they stand to gain? Many ESG investments are also proprietary products, meaning the company that employs your advisor may be the same company that can earn commissions and fees from the sale of the product. It’s always important to ask about the existence of any conflicts of interest, commissions and fees, and to be skeptical of solutions offered by someone who doesn’t know your exact needs or goals.
Second, greenwashing exists in the financial industry. Just like food producers sell non-GMO orange juice at a premium (GMO oranges don’t even exist), investment product managers have been caught falsely promoting that their products are more socially responsible than others. Consider an ESG fund that invests only in companies which limit carbon emissions. It sounds socially responsible, so you invest. Unbeknownst to you, those “green” companies are selling their government-granted allotments of carbon dioxide output to other companies for a profit. Now, the commissions and fees attached to the fund have eaten away at your annual returns, the world is no greener for your sacrifices, and your good stewardship has been exploited. Regulatory agencies have prioritized this issue and are working to regulate ESG marketing to protect investors. However, the term “socially responsible” is subjective and means different things to different people. It’s been acknowledged that regulation might never come. So, what can you do?
Rest assured that honest, low-cost ESG products do exist if you know what you’re looking for and your advisor isn’t incentivized to promote specific products. As a CFP® Professional required to put my clients’ best interest ahead of my own, I would first recommend you identify your financial goals and have a solid financial plan developed. Then, I would select a nonbiased range of ESG investments if that was your desire, simulating varying exposures of each product in question to determine what your portfolio can tolerate without sacrificing long-term returns beyond your risk capacity. Only then would I advise you to treat your portfolio to an ESG allocation. If your advisor is skipping these key steps – you’re likely getting tricked.
Published in the Victoria Advocate
Hannah K. Gohmert is a CERTIFIED FINANCIAL PLANNER™ Professional and the Chief Compliance Officer for KMH Wealth Management, LLC.