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The problem with investing in ESG funds

Are ESG funds a marketing gimmick? ESG stands for Environmental, Social, and Governance and are supposed to represent companies that are suitable for the socially conscious investors. As of 2021, per Bloomberg, ESG assets are nearly $38 trillion. From my research, fund companies might be using ESG funds just to gather more assets and don't actually do a great job differentiating their holdings from their non-ESG counterparts.

To give you background, per Investopedia: "Environmental criteria consider how a company performs as a steward of nature. Social criteria examine how it manages relationships with employees, suppliers, customers, and the communities where it operates. Governance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights." Investing in companies that strive for sustainability, support social causes, promote diversity, and want to make the world a better place is especially important for my age group, (Millenial/GenZ). We have grown up aware of social injustice and threats to the sustainability of our planet. Knowing that we have another 50-70 years left on this planet makes us want to do better. So do these ESG funds live up to our expectations?

From my research on ESG funds, I have noticed that ESG funds do not differ a lot from their non-ESG counterparts except for having higher internal fund expenses. For example: the first screenshot is ESGU, which is an ESG fund for large-cap and mid-cap companies in the U.S. created by iShares. Compare that to the second screenshot, which is SCHX, a fund also containing large-cap U.S. companies, and you will see that the holdings are nearly identical (you only see the top 10 holdings in the screenshot, but if you were to research all of the holdings you will see that they are super similar). The only difference in these funds seems to be that ESGU has an expense ratio of .15%, while SCHX has an expense ratio of .03%.

Another concern I have is the process for vetting which companies are ESG. For example, the company Meta Platforms (facebook), is infamous for breaching customer’s privacy rights. If you would like to read a timeline of their breaches, follow this link.

To me, Meta wouldn’t fit into the socially responsible category due to these transgressions. I'm sure I could find other companies that do not belong with more research, but Meta is just a super obvious one that these fund managers should do more analysis on, especially considering that it's a top holding.

If you plan on investing in ESG funds, do your own research on their holdings first in order to see if you agree with their analysis, and understand that you will probably pay more in internal fund expenses due to the nature of the fund!

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