Stealth ‘ESG’ Scams Can Kill Your Returns

Maybe you missed this Wall Street Journal headline in early June…

Frankly, this kind of thing is common in the grand scheme of finance. But the reason behind this particular resignation doesn’t happen every day…

You see, Asoka Woehrmann was the chief executive of Deutsche Bank’s funds arm, DWS, until last Thursday. That’s when he resigned because of “greenwashing.” No kidding…

German authorities accused Woehrmann of misrepresenting his team’s “ESG” funds.

In case you’re not aware, ESG stands for “environmental, social, and governance.” It’s essentially Wall Street’s way of describing “investing for a cause” or “do-gooder investing.”

In September 2018, DWS wrote a report about investing responsibly under this basic ESG framework. The company claimed to be a responsible investor for the previous 20 years.

Apparently, the German authorities disagree.

Now, it might seem like this battle doesn’t involve you. But don’t let the problems in the ivory tower fool you… Individual investors face this problem every day.

Unfortunately, it’s not just about DWS. Many funds aren’t quite what they claim to be. And in the end, these misrepresented ESG funds can chew up investors’ gains for no reason.

So today, let’s take a closer look at how stealth ESG scams can kill your returns…

ESG investing is a fad in the investing world.

The idea is that investors can choose to only invest in ethical companies. And as I noted earlier, this approach spans three different categories – environmental, social, and governance.

ESG investors intend to invest in socially “responsible” companies. And they want to avoid the “irresponsible” ones.

In principle, it seems like ESG investing is about putting your money where your mouth is. But unfortunately for investors, that’s not often what actually happens…

One survey of ESG funds years ago found that 95% committed at least one of the “seven sins of greenwashing.” These seven sins include things like outright lying and tricking users into making hidden trade-offs.

That’s how German authorities set their target on DWS. Prosecutors found evidence that the company wasn’t using its claimed investing criteria.

That presents a major problem for individual investors…

You see, ESG-oriented funds held around $350 billion as of the end of 2021. But that doesn’t mean investors are getting the “feel good” results they want from these investments…

Just look at the Vanguard ESG U.S. Stock Fund (ESGV) as an example. Its top 10 holdings might surprise you…

ESGV is one of the world’s largest ESG-focused funds. And yet, as you can see, it looks and performs a heck of a lot like an S&P 500 index fund.

However, there’s one critical difference for individual investors like us…

The ESG version has a significantly higher fee. ESGV’s net expense ratio is 0.09% today, while the Vanguard 500 Index Fund’s (VOO) net expense ratio is only 0.03%.

Even “low fee” Vanguard charges three times as much for its ESG fund as it does its broad market fund.

So the recent case with DWS in Germany is likely just the start. If the Vanguard example is any indication, we can expect to hear more accusations of greenwashing in the near future.

The bottom line is…

If you care about ESG, be wary of these types of “one click” investments. Your best bet is to do the research yourself.

Draw your own conclusions. And then, invest in ESG accordingly – or not at all.

Good investing,

Karina Kovalcik

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