Signals: ESG is broken– how to fix it

The investing world is designed to promote shareholder value, not shareholders' values. Today’s ESG model is ripe for disruption.

Signals: ESG is broken– how to fix it

Hey fintech friends,

ESG is turning out to be kind of a womp womp: Why do investors pay a 40% premium on fees for ESG funds versus traditional funds when these portfolios don't necessarily outperform the market? How come there's even evidence that these companies have worse track records for labor and environmental compliance than companies in non-ESG portfolios?

On that note, why is ExxonMobil one of the top 10 holdings in the S&P 500 ESG Index if it runs the highest-polluting oil refineries in the US? How come cigarette giant Phillip Morris has an S&P ESG score of 83, when Tesla's is only 37? What does an ESG score of "37" even mean?

We need to have a talk about ESG investing. ESG has been touted as a way for investors to promote corporate responsibility, in a world where companies are driven to action by movements in their stock price. It stands to reason that responsible corporate behavior drives better business performance, so shareholders– who in principle govern the companies they've invested in– should be pushing for this anyway.

In reality, the vehicles that most investors use to gain exposure to ESG are still principally designed to drive short-term returns, not to push companies to do more recycling (or whatever). There's even a credible argument to be made that ESG investment worsens a stock's financial performance by driving up volatility.

It doesn't have to be this way! Investing can very well let investors to champion the causes they care about– without jeopardizing gains. Getting there requires a sea change in how investment products are structured to give shareholders an active say in portfolio companies' decisions.

Let's dive into what's going wrong with the current ESG model, and what the journey to achieving ESG's true aims looks like.