ESG. Seems like a good idea.  Well-meaning.  But what really is ESG?  Environmental Social Governance (ESG) strategies can be defined and implemented in so many ways that even the SEC is showing increasing concern about the lack of consistency and general confusion that ESG is creating across the industry.   

Does the SEC want strategies being sold to consumers where alternative objectives (other than financial gain) are touted, but can’t be measured? 

“In avideo posted on Twitteron Tuesday, [March 1, 2022], Gary Gensler, [SEC Chair], noted that there are currently at least 800 registered funds, with more than $3 trillion combined AUM, that claim to invest in assets that achieve some sort of ESG—short for environmental, social, and governance—goals. ‘But what information stands behind those claims that the funds are green or sustainable?’, the SEC chief asked.  Due to a lack of a regulatory framework, asset managers are using their own criteria in declaring that funds target ESG goals. What they mean by certain terms can vary greatly. Some of them disclose such information in detail, while others offer less.” [1] 

Further, despite all of the hype around this concept, there is limited evidence that implementing an ESG strategy will lead to better returns.   

What index do you use to compare performance?  

Conveniently, a lot of these ESG ETFs have created their own customized indexes that they measure themselves against. 

How does one deal with a company like Apple?   

Apple is held out as a beacon of corporate responsibility, largely for its social and data privacy policies – in many, if not all ESG portfolios for years.  But how do you consider the impact that they have had on places like Baotou, Mongolia, where rare earth elements are mined and produced, and the environment has been destroyed?  Their products are completely reliant on these metals.  Would it have been more environmentally and socially responsible to have lower margins and support the development of companies in other locales that require mining and production to take place responsibly?  We think so.  For its part, Apple finally got the message. In 2019, 12 years into iPhone production, Apple started using recycled rare earth metals for about a quarter of its supply needs.  Supposedly, the new iPhone 12 and later models have higher recycled content. 

The war in Ukraine has highlighted additional challenges.  

 A recent Bloomberg article asks: “How can fund managers buy Russian government bonds and shares of state-backed energy giants while claiming to be committed to the highest environmental, social and governance principles? Arguably they can’t….”  Another article pointed out that: “[h]undreds of ESG funds run by some of the world’s biggest money managers have a combined $13.4 billion stake in companies that supply weapons and technology to the Myanmar military, according to a report.  The funds…have investments across 33 companies that the United Nations and two advocacy groups say provided weapons, communications and technologies to the military, Inclusive Development International and ALTSEAN-Burma said in a report released Wednesday….Roughly 14% of sustainable funds globally held Russian assetsbefore the war began, an allocation that now looks questionable on principle and in practice.” [2] 

These examples illustrate the difficulty faced by a well-meaning manager in trying to implement an ESG strategy coherently. 

Political agendas have crept into the equation as well. 

Groups may be seeking to use the ESG label to further other objectives and hold managers to potentially unrealistic standards, such as with the UN-backed Principles for Responsible Investing (PRI). Signing the pledge is a critical badge of ESG street cred.  As of March 31, 2021, there were 3,826 signatories representing $121 trillion AUM required to sign a pledge to urge companies they owned to address any human rights problems, anticipate them, and remedy them. [3]  So, what’s the problem? Who would be against promoting human rights?  Yet, as a 2020 Barron’s article points out: “…investors can be said to have contributed to or be linked to negative human rights outcomes if an investor facilitated human rights harm by a company, knew or should have known about the harm, and didn’t take steps to mitigate it.”[4] How do you measure and evaluate these things?  Does financial materiality matter? 

How does a small firm put in place a regime to ensure compliance?!?  Are the supposed standards even achievable for anyone but the largest managers?  This and other things make it very difficult for smaller managers to compete, stifling competition and innovation over time, leaving investors with a small number of very large providers with homogenous investment strategies and products.  Active Share studies by Cremers/Petajisto suggest that would be a mistake.  Simplistically, the best managers over time are the ones that look different from the benchmarks they are competing against. 

For our part, we do consider how well a company is managed.   

Although for us, it will always be a combination of quantitative data and qualitative judgment in utilizing any new metric.

Over time, I’m sure we will find ways to include some of these concepts into our scoring system, as certain factors demonstrate efficacy.  For instance, board diversity seems like a no-brainer and there is evidence already that it leads to better-managed companies.   


Investment Advisory Services are offered through Validus Growth Investors, LLC (“Validus”), an SEC Registered Investment Adviser. No offer is made to buy or sell any security or investment product. This is not a solicitation to invest in any security or any investment product of Validus. Validus does not provide tax or legal advice. Consult with your tax advisor or attorney regarding specific situations. Intended for educational purposes only and not intended as individualized advice or a guarantee that you will achieve a desired result. Opinions expressed are subject to change without notice. Investing involves risk, including the potential loss of principal. No investment can guarantee a profit or protect against loss in periods of declining value. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Opinions and projections are as of the date of their first inclusion herein and are subject to change without notice to the reader. As with any analysis of economic and market data, it is important to remember that past performance is no guarantee of future results.  

[1] SEC’s Gensler Is Targeting Greenwashing of ESG Funds | Barron’s ( 

[2] ESG Funds Scolded for Investing in Myanmar Arms Suppliers  

[3] Enhance our global footprint | PRI Web Page

[4] Human Rights Is the Next Frontier of Sustainable Investing | Barron’s (