"Funds that market themselves as sustainable investments aren’t necessarily focused on companies that fight climate change, develop wind turbines or promote diverse boards.
Instead, many of them look a lot like a portfolio of big technology stocks.
The five most commonly held S&P 500 stocks in actively managed sustainable equity funds last fall were Microsoft Corp., MSFT 0.89% Alphabet Inc., GOOG 0.40% Visa Inc., V 1.39% Apple Inc. and Cisco Systems Inc., CSCO -0.74% according to an RBC Capital Markets analysis.
Companies focused on issues that the environmental, social and governance (ESG) movement has come to be associated with, such as renewable energy, clean water, and racial and gender diversity, are relatively underrepresented among such funds. For instance, NextEra Energy Inc. is the world’s largest operator of wind and solar farms. It wasn’t on RBC’s list of widely owned stocks in ESG funds. But big tech companies like Amazon.com and Facebook are on the list.
The data point to one of the biggest frustrations critics have about the world of socially conscious investing: There is no industrywide rulebook to determine what should go into ESG funds.
Some fund managers screen out all companies from a certain industry, like oil and gas, and focus on smaller, lesser-known firms at the forefront of areas like clean energy or boardroom diversity. That risks delivering returns that might drastically trail behind the broader market. So the institutions behind the biggest ESG funds often follow another playbook: They try to minimize how much their fund deviates from the broader market by creating a portfolio that, for the most part, looks like today’s technology-dominated S&P 500—just stripped of the companies with the worst ESG practices within each industry."
"Many of the tech companies that are among the most popular stocks in sustainable funds have earned high ratings across multiple elements that analysts consider in evaluating ESG practices.
Index provider MSCI Inc. gave Microsoft an “AAA” rating on ESG—the highest possible score, awarded to just 4% of companies in the software and services industry. It cited the company’s strength on privacy and data security, corporate governance, lack of corruption and instability, and clean-tech-innovation capacity.
Yet other companies often included in sustainable funds have struck investors as more controversial choices.'
MSCI gave Facebook and Amazon poor ratings on privacy and data security and on labor management, respectively. The two stocks are held by a number of large sustainable funds anyway since they satisfy other criteria. For instance, Brown Advisory’s Sustainable Growth Fund excludes companies that conduct animal testing for nonmedical purposes, own fossil-fuel reserves, derive revenue from “controversial weapons,” or defy the United Nations Global Compact Principles—but doesn’t have in its prospectus any language that disqualifies companies with controversies related to user privacy or labor rights."
"'The fact that definitions of ESG can vary so much from firm to firm has caught the eye of the Securities and Exchange Commission. The agency has sent letters to companies asking advisers how and what they determine are socially responsible investments, The Wall Street Journal reported last year.
Republican SEC Commissioner Hester Peirce has criticized not only the ESG movement but also the way that companies produce ESG ratings and scorecards—saying in a June speech that “ESG is broad enough to mean just about anything to anyone.”"
Is it a retailer’s job to keep shoppers from their vices? (or Adam Smith vs. CVS pharmacy)
Can You Find Virtue by Investing in Vice?
What if companies pledge to adhere to social and environmental accountability guidelines?
Conspicuous Consumption, Conspicuous Virtue, Thorstein Veblen (and Adam Smith, too!)
Data show that socially responsible investments can outperform the S&P 500 index
Is altruism a result of selfishness?
Do you have to be selfish to make more money?
Does collective self-deception mask selfish behavior?
Why Doing Good Makes It Easier to Be Bad
Businesses intentionally display their social and environmental performance in addition to their financial performance to stakeholders
Should you invest according to religious guidelines?
ESG Funds Draw SEC Scrutiny (companies that pursue strategies to address environmental, social or governance challenges)
For a humorous view of this issue see
A Snickers a Day Keeps the Doctor Away: Why does CVS want to make my migraine cures hard to find? by Joseph C. Sternberg of the WSJ