E.S.G. Good for Wall Street Bad for America

By David Nelson, CFA
E.S.G. What is it? Why is it important? And why did Congress just vote to block President Biden’s Department of Labor rule, a rule that encourages private retirement fiduciary is to use ESG in the decision-making process?
The bill passed both the House and Senate with bipartisan support on a very slim majority. It now heads to the White House, where the President has promised to veto the legislation as soon as it hits his desk.
Make no mistake, both sides are in this for the long haul, and the battle to control your investment dollars is only going to get bigger. The numbers aren’t small. This decision is going to affect more than 150 million Americans.
ESG stands for Environmental, Social and Governance. The guiding premise, at least as it originally was envisioned, was to promote policy that would lead to a sustainable society. Part of its mission was to focus on issues in the workplace that dealt with worker rights, diversity, equal pay and many more. I think most of us want to see the sustainable platform succeed, but the rational among us know that we aren’t going to get there by trashing the global economy along the way.
Ground Zero

Fossil fuel companies are ground zero in the ESG fight. Too many believe that steps should be taken to reduce their access to capital. In fact, President Biden ran a campaign promising to put these companies out of business. Any rational view of alternative energy has to include fossil fuels, at least until these other platforms are ready to scale.

Electric cars are great and certainly a big part of the future, but when you get home, you’ve got to plug them in. What you do you think is charging your Tesla? Solar and wind can supply part of the power, but until energy storage is much further along, they can’t possibly handle the base load on their own. Until that day, fossil fuels will be with us for a long time.
Top 10 CO2-emitting countries in the world (Total CO2 in Mt) – EU JRC 2020

By the way, the utopian greener society that’s been promised can’t be achieved if the other major players don’t come along. China, without question, is the world’s biggest polluter. When it comes to CO2 emissions China is number one emitting almost twice as much as the United States.
We can debate the pros and cons of ESG, but when it comes to investing, the goal is to make money for the beneficiaries. When it comes to retirement, we’re talking about people’s life savings and quality of life in their golden years.
Good for Wall Street, Bad for America

Many of today’s ESG funds look more like an index fund, but with higher fees. It’s no wonder the poster child of ESG investing and biggest cheerleader is none other than Larry Fink, CEO of BlackRock, a fund company with close to $8.6 trillion in assets under management.
Do the Math!

BlackRock’s ESG Aware Fund (ESGU)

Bloomberg Data

Here is one of BlackRock’s top offerings, the ESG Aware Fund (ESGU). When you look under the hood, you’re going to see a lot of familiar names Apple, Microsoft, Alphabet, on and on. As a matter of fact, when you dig deeper, you can see that it looks an awful lot like an S&P 500 index fund. So much so that when you look at just the top ten holdings, there’s almost no difference.

Vanguard S&P 500 ETF (VOO)

Bloomberg Data

Let’s look at the Vanguard S&P 500 ETF Index Fund (VOO)  Perhaps the biggest difference in the top ten holdings is Warren Buffett’s Berkshire Hathaway with a 1.66% weighting. Trust me, BlackRock owns it, too, but just a little less. Even the ESGU energy weighting is less than 5 basis points difference from the index. For these genius active management ESG decisions, you pay 15 basis points or 0.15%.

ESGU vs VOO 2 Years

Bloomberg Data 

Get out the calculator.

The fund has $19.3 billion in assets. That works out to almost $29 million in annual fees. Vanguard’s index fund charges just three basis points or 0.03%. You don’t have to be an MIT graduate to see that on just this one fund, BlackRock pockets an extra $23 million.
There are countless studies on ESG investing, but a recent article from the Wall Street Journal really hit home. They point to a Harvard study that showed only $0.30 on every dollar is going to companies that ESG investors really care about. The rest of it is invested in stocks you would find in any other fund. That basically takes the average green ETF fund fee of 0.17% and triples it.
Wall Street is genius at coming up with investment products that offer little in the way of innovation but convince you to pay more for it.
Vanguard pulls out

Some fund companies see the light and are turning their back on ESG. Vanguard CEO Tim Buckley recently pulled out of the Net Zero Managers Initiative, affirming his fiduciary duty to clients. Talking to the Financial Times, Mr. Buckley said, our research indicates that ESG investing does not have any advantage over broad based investing.
Green Paint
Here’s another insider Tariq Fancy, former BlackRock chief investment officer of Sustainable Investing on CNBC, said the following. This is a fight over marketing. He refers to it as green paint and that ESG was focused on Democrats saying much of the ESG policy aligns itself with progressive views.
Back to the legislation on the president’s desk. Like I said earlier, we’re talking big numbers here. This affects more than 150 million Americans. The president is set to veto this legislation, doubling down on social policy he couldn’t get through Congress. Unlikely, the Senate has the votes to override this veto, but you can bet this will be an election year issue in 2024.
All in ESG. Great for Wall Street, for America, not so much.