November 15, 2021

Over the years, various terms have been applied to explain ways to invest ‘more responsibly.’ Terms such as SRI (Socially Responsible Investing) and ESG (Environmental, Social, and Governance Measures) were early to the market. Now, almost any combination of the words Sustainability, Green, Ethical and/or Eco will attract investment dollars.

If you’re an investor who has thought about moving some dollars towards this category of investments, the question is how to make an appropriate investment decision. Unfortunately, as happens all too frequently to investors, not all products and individuals who have jumped into this investment category have been responsible themselves. 

Trying to invest responsibly can cross many boundaries. Is it important that a company treats its employees with dignity by paying fair salaries and providing appropriate benefits? Does it matter if a company is carbon-neutral or not? (Carbon-neutral refers to offsetting carbon dioxide emissions with countering strategies, such as planting trees.) Does the company replenish resources at a faster pace than it depletes them? If it’s a manufacturing company, are there by-products that are harmful to the water? Or to the surrounding community? Or the community at large? Does a company’s board of directors include diverse representation? Is senior management diverse? While the list isn’t endless, it can go on for a while.  

Investors often have multiple objectives, such as saving for retirement, or education, or for legacy reasons. Regardless of individual objectives, there’s one over-arching goal that is common to all: growing the portfolio over time. Some investment strategies may be more aggressive than others, but long-term growth is always at the core. That begs the question: Do ESG funds/stocks/ETFs perform as well as other equity funds? Might the performance of your portfolio be negatively impacted if you were to add an ESG or similar investment to your portfolio?

FORTUNE Magazine¹ recently ran a piece on the “alt-milk favorite Oatly.” The article highlighted an attack against Oatly by a New York investment firm (Spruce Point). Spruce Point “alleged that Oatly doesn’t practice what it preaches when it comes to ESG … and especially to sustainability. The world’s hottest vegan milk it insinuated, just isn’t that green.” That’s in stark contrast to the fact that Oatly constantly reminds consumers “that oat milk is more earth-friendly than cow’s milk.”

Spruce Point wrote: “The company had produced abnormally high levels of wastewater at a New Jersey plant…And what about the environmental impact of transportation? Oatly, after all, had been shipping oat milk halfway around the world – from Sweden to China, most notably – in a feverish grab for new customers.”

If you were an investor who purchased stock in Oatly because of it’s sustainability story (their milk is better for the environment than milk produced by cows), you probably would have been upset to: (a) learn that Oatly wasn’t as environmentally friendly as you thought, and (b) that the stock dropped 21% after the Spruce Point report. How long can a portfolio ‘sustain’ losses like that?

FORTUNE cites a professor at MIT who admits, “We don’t have a very good way to measure ethical behavior.” Further, “depending on which lens observers use, and what kind of ethical behavior they prioritize, the same company can look like a hero or a villain.” With almost 5,000 funds in this investment space, the stakes are high indeed.

If you have been considering adding an ESG investment to your portfolio, you probably won’t add any clarity to your thinking when you learn that “some ratings bodies give BP, one of the world’s biggest producers of petroleum, higher ESG scores than Tesla, whose mission is to make petroleum obsolete.” Huh?

The bottom line is while we may be able to help find you funds that tout themselves as green or any other descriptor noted above, it’s very difficult to confirm that every holding within the fund is actually operating in a way that’s good for the environment. After all, if you buy a sustainable fund, only to learn that it’s biggest holding is BP, how carbon-friendly would you feel?

¹ Dunn, Katherine. “Oatly Learns That It’s Not Easy Being ‘Green.’” Fortune, 11 Oct. 2021.

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