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ESG Investing: Investors Misled, Nobody Knows What They Own

This article is authored by Mark Neuman, CIO & Founder of Constrained Capital, and creator of the ESG Orphans’ Index.

ESG investors have been misled. ESG investing says one thing and does another. Those owning ESG funds may find their exposure runs counter to Wall Street legend Peter Lynch’s adage, “Know what you own.” This is a big risk in the markets.

Mondelez (MDLZ) makes Chips Ahoy and Oreos. Coke (KO) and Pepsi (PEP) make heavily-sugared, caffeinated sodas and junk food. Some of these products are the least healthy manufactured foods in the world, filled with high fructose corn syrup and preservatives, and they offer zero/negative nutritional value. Obesity and diabetes are major national health issues. None of this does good for society, the “S” in ESG.

Mondelez is overweight in many ESG funds. As are Coke and Pepsi, sellers of expensive reconstituted tap water and while producing millions of plastic bottles. Both are owned by most ESG funds. Should these companies be in ESG funds?

AAPL and AMZN, two of the biggest companies in the world, also have two of the biggest carbon footprints in the world. These are overweight in hundreds of ESG funds. Again, are they ESG leaders? These companies receive massive ESG inflows. Investors have been herded into ESG funds, into names like MDLZ, PEP, and KO on the promise of ESG benefits.

Do ESG do-gooders know what they own in the “ESG” funds? We don’t think so.

The entire ESG ratings’ system is “aggregate confusion,” according to MIT. Under the ruse of “doing good,” Wall Street is herding investor money into ESG funds only to find ESG investors own some of the worst ESG-practicing companies.

The pushback has begun. Funds are being shuttered for false “ESG” claims. Morningstar shut down $1Tln worth of funds recently on bogus ESG claims. The ESG investing pendulum is reversing.

Constrained Capital investigated ESG extensively. We even found ESG practitioners saying their companies “check boxes” for ESG due diligence to make sure they answered all the questions properly in order to score higher in the ratings. They are gaming the ESG system.

The disparity between what these companies say and do is massive. Risk/return analysis shows investors are paying up for less return, with no change or increased risk posture. With 10 ratings’ agencies with different “E,” “S,” and “G” scores for the same company, there cannot be a uniform ESG score for everyone to follow and abide by in investing.

Very few ESG funds are differentiated. They all mimic the SPX in return profile within a few basis points and charge excessive fees for that marginally differentiated, often underperforming result.

Aswath Damodaran has done extensive ESG research and his views on the subject were a jumping off point for our investigation. He claims, “You cannot create a measure of goodness and force it upon everyone.” He also discusses the massive ESG industry and lack of achieving any substantial goals other than collecting massive fees while claiming to “do good.”

At Constrained Capital, our goal is to help investors find the best risk/reward opportunities for their invested capital. We seek greater expected return securities. Industries under capital constraints, all of the ESG Orphans Index securities under ESG pressure for a decade, provide this opportunity.

The ESG Orphans Index is a straight forward, what you see is what you get, index of securities. We are not conflating investment returns with virtue signaling, moral persuasion. Your investment dollars should be put to work to attain maximum economic reward for limited, defined risk.

We are not against ESG and altruism. We are against investors being misled, charged high fees, and getting poor returns as a result. Big investment companies and mutual funds, claim ESG is, “Democratizing investing,” by picking winners and losers and deciding who is in and out of the club. They’ve decided the measure of global goodness and wish to enforce it by herd mentality. This seems the opposite of “Democratizing investing.”

We created the ESG Orphans Index to deliver high expected returns in stocks due to capital constraints placed on sectors because of the inconsistent, incongruous ESG investing process. As the pendulum shifts and reality sets in, investors want to know what they own. The Orphans are these types of securities excluded due to the vagaries of ESG investing and are set benefit from the coming reversion.

The ESG Orphans Index are a straightforward, direct investment approach for your money. There are no false pretenses or virtue signals involved. You know what you own in the ESG Orphans Index. Over time, more and more investors will realize this developing trend.


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