Asset managers love ESG investments partly because they come attached with higher fees. According to Morningstar, the asset-weighted average expense ratio for ESG funds was 0.61% compared to 0.41% for their traditional peers. These significant financial incentives may encourage some asset managers to engage in misleading marketing campaigns.
For instance, several asset managers have come under pressure for ‘greenwashing’ their portfolios, or claiming an ESG focus without evidence. While the SEC and other watchdogs are setting up regulatory and supervisory frameworks, the U.S. ESG market remains largely unregulated, leaving investors to conduct their own due diligence.
Be sure to check out this article to learn more about greenwashing.
Many asset managers also promote ESG funds as ways to outperform the market while making a positive impact—a win-win for everyone. While ESG funds beat their traditional peers in the past, there’s no guarantee that these funds will continue to outperform. In fact, the growing interest in ESG could diminish its competitive edge over time.
Of course, there are some legitimate and effective ESG options for investors. For example, the Transform 500 ETF (VOTE) successfully voted in its slate of directors at Exxon Mobil (XOM) to force positive ESG-related change at the oil giant. Also, many actively managed ESG-focused ETFs support renewable energy and other initiatives.