About a week ago I stumbled onto an article that absolutely blew my mind. It originally came out in 2015 and was recirculating for some reason. The article is about Baotou, Mongolia, home to one of the world’s largest rare earth metals mining and refining operations. Rare earth metals are important resources for the manufacture of today’s advanced electronics. They get processed into everything from magnets to abrasives to help fuel our insatiable desire for new technology.
The pictures in the article are nothing short of shocking as they show a literal lake of toxic sludge from the refinery that puts the Mon river in the 80’s to shame. The article was a stark reminder to the reporter and to me that our smooth, convenient modern lives still come at a cost even if it’s not right in front of us.
Apart from the slight guilt I felt for playing a small part in that sludge lake, I couldn’t help but feel lied to as well. I mean tech companies are supposed to be green. They connect us without the need for travel, they reduce our need for paper, they make so much money that they can donate to everything. Yet here we are looking at a mining operation that makes a nuclear powerplant feel like a countryside retreat.
As an investor it would seem I’m not alone in not wanting to be a part of future toxic waste dumps, and as it turns out, people are putting their money where their minds are by increasingly looking to ESG investing as a way to do the right thing. ESG stands for Environmental and Social Governance. Funds who claim to invest by ESG principles are supposed to invest in a more responsible way than your standard fund.
While the sentiment of ESG investing is good, naturally Wall St. saw an opportunity to make money and started slapping the ESG acronym on anything they could get their hands on. In 2017 40 new ESG funds hit the market and that number has increased since. The current issue with ESG is that there is really no definition of what an ESG fund has to do to use those letters.
An ESG manager could be many different things. They could just not own certain industries, screen for companies with low carbon emissions, or they could be activists in certain areas like clean water and power. Now, there are also managers and companies who are extremely legitimate in this space and have been investing this way for decades.
The point I’m making is you still have to evaluate an ESG fund just like any security, but you also have the extra layer of making sure they’re actually investing in a way that is consistent with what you want to see.
ESG funds may not be broadly diversified or may omit popular stocks that will make their performance very different from the broad market. Because of this it is important to reconsider your expectations for those investments before you purchase them and be mindful of how those will impact your overall investment goals.
Fortunately, as ESG investing has gained popularity, more advisor resources have become available to evaluate the space. If you have questions on this type of investing, please reach out to us. Don’t end up like many, buying an ESG fund to be green and finding out later that you’re the proud part owner of a toxic waste dump.
This material is intended for educational purposes only and should not be construed as investment advice, a solicitation, or recommendation to buy or sell any security or investment product. Please consider the investment objectives, risks, charges, and expenses carefully before investing. Some investments are not suitable for all investors, and there is no guarantee that any investing goal will be met. Past performance is no guarantee of future results.