I was having a discussion about finances recently with Lyna Mansouri, host at CISM, the University of Montreal’s radio station, when she expressed what many investors are thinking these days.
“I want to invest my money,” she said. But I don’t want to invest in companies that destroy the world. »
Sometimes we feel like we’re making a deal with the devil when investing. Yes, we know that we will probably get rich in the long term. But at what cost ? And are our investments destroying the world?
I have three news to give you: two good, and one bad.
First good news, no, our investments are not destroying the world. This is because, contrary to popular belief, when we buy the stock of a company, our money does not end up in the pockets of that company.
If I woke up tomorrow morning, sold all my investments and invested 100% of my money in ExxonMobil oil stocks, not a single dollar of my money would go to ExxonMobil.
For what ? When we invest in the stock market, our money does not go to the company whose shares we hold, but to the person or institution who held the shares before selling them to us.
If people buy less gasoline, ExxonMobil makes less profits and its stock price falls, the fact that I own shares is not going to change the fortunes of the company. In the extreme, it could go bankrupt, as “outdated” companies like Sears or Kodak have done, and my actions would make no difference.
ESG funds
Beyond the impact of our dollars, many people are uncomfortable opening their fund’s information page and seeing that they own all kinds of companies that they would ultimately like to see. disappear.
Knowing that our financial destiny is partly tied to the success of businesses with which we disagree is not ideal.
This brings us to my second point. In recent years, “responsible” ways of investing have emerged. The most popular products in this trend are funds that take into account environmental, social and governance (ESG) criteria.
Managers who assemble ESG funds may exclude different types of industries, such as guns, the oil industry, private prisons, gambling, etc. ESG funds are now offered by the majority of financial institutions.
For example, BlackRock offers an all-in-one balanced iShares fund with 60% stocks and 40% bonds (GBAL), a growth fund with 80% stocks and 20% bonds (GGRO) and an all-stock fund ( GEQT). BMO offers the ZESG Balanced Fund, which is 60% stocks and 40% bonds.
These funds contain proportionately more technology companies than non-ESG funds, so are likely to be more tied to the ups and downs of that industry. But they remain very diversified, with exposure to more than 1000 companies around the world. The management fee is 0.25% per year for BlackRock funds, while BMO’s ZESG fund has a management fee of 0.20%. These funds with low management fees are only accessible to independent investors, those who purchase their investments themselves via a brokerage platform.
Flat
That said, ESG funds are not always what we would like them to be.
Some ESG funds have high management fees. This is particularly the case for SocieTerre and Desjardins funds. These funds come with an annual management fee of up to 2.39%, which includes fund expenses, as well as advisory fees.
Furthermore, ESG fund managers sometimes make choices that will not please everyone. For example, the SocieTerre and BlackRock funds hold shares in RBC, a bank that massively finances oil companies. BMO’s ZESG fund contains an investment in the pipeline company Enbridge.
How it is possible ? Strictly speaking, a bank is not a very polluting company. So banks tend to be included in ESG funds. It also often happens that these funds keep the “best student” in a polluting industry. The one who makes efforts to be greener, who has measurable carbon neutrality objectives, etc.
“Pariah” companies
Which brings me to my third piece of news, the bad one.
Several studies have been conducted on the impact of ESG investing. The conclusions are not exciting.
One of the key concepts of the ESG movement is that by excluding polluting companies from investors’ portfolios, they will become “pariah” companies. In the long term, their stock market value will decrease. In return, a lower stock market value will have the effect of increasing the borrowing costs of these companies, and therefore harming their profits.
That’s the theory. How does it work in practice?
A 2023 study from Boston College and Yale, shared recently by Benjamin Felix, director of research and portfolio manager at PWL Capital, showed that in the event that polluting companies’ borrowing costs are negatively affected by ESG investors, the first thing these companies let down is… their environmental agenda.
Consult the study Counterproductive Sustainable Investing: The Impact Elasticity of Brown and Green Firms (in English)
In short, by wanting to “punish” polluting companies, ESG investors reduce the efforts of these companies to help society and the planet.
When it comes to making the world a better place, I don’t have the answer. But ESG investing is probably not the answer.
Benjamin Felix, Director of Research and Portfolio Manager at PWL Capital
So what is the solution?
The Desjardins Solidarity Savings Bank offers its members the opportunity to invest in social returns. Savers’ deposits are used to provide solidarity finance, particularly with associations, cooperatives and unions.
Visit the Caisse d’ économique solidaire Desjardins website
The Caisse currently offers 3-year term savings at 4.00% per year. For all social return products, we obtain an average return of 2.5% for 2023. In short, these are safe investments… and the returns reflect this. With such returns, investors should save and invest more money to hope to see their assets grow and multiply over the years.
The first task of every investor is to build a portfolio with which they are able to sleep well. Investing is too emotional an adventure to embark on with an inadequate portfolio.
If they allow you to start or continue investing, ESG (imperfect) funds may be for you. Even if they probably won’t solve the world’s problems.