Sunday, October 24, 2021
Bernard Sharfman has posted an interesting op-ed on Insider (here). Excerpt:
The idea behind ESG's impact on climate change is that by moving money away from companies that spew fossil fuels, the funds can effectively make it cheaper for "clean" companies to raise money either through debt or equity offerings and more expensive for "dirty" companies. This sounds good in theory, but does not hold up in reality because the major effects of ESG funds are on the secondary market, where securities are traded but no new money is being raised. As explained by Fancy, investing in ESG funds does not provide new funding for those companies that would help mitigate climate change. "Instead, the money goes to the seller of the shares in the public market." Basically, ESG products are buying stock in companies from other asset managers, not the underlying businesses, so they aren't directly funding these firms at all....
If ESG funds do not mitigate climate change, what is the motivation for marketing these funds to investors? The simple answer is that the investment industry, which includes large investment advisers, rating agencies, index providers, and consultants, makes a lot more money when investors purchase shares in ESG funds versus plain vanilla index funds where the management fees sometimes approach zero.