WHY DO PEOPLE THINK GREEN INVESTING IS A BAD IDEA

You likely know that we at Balanced Capital are huge proponents of green investing. But we also know that there are two sides to every story, so we wanted to explore the counter arguments against green investing. Of course we weren’t going to list these criticisms without offering our response!

PERFORMANCE

By far the most commonly sited critique of green investing is that portfolios built around sustainability will underperform their peers. A quick google search for ESG investment performance will pull up countless studies and comparisons that have shown just that. In researching this post we found a very convincing article that showed that ESG funds underperformed their respective indexes over 1, 3, 5, and 10 year periods. That data doesn’t look good if you are a proponent of green investing, after all, isn’t the entire point of investing to earn as much return on investment as possible?

The problem with the performance based argument is twofold. The first reason being that pat performance is not necessarily a predictor of future returns. If that phrase sounds familial, it is because investment professionals use it all the time when talking about expected returns. The second reason, is that the same google search will also pull up countless studies showing that green investments in fact outperform their respective indexes over those same periods. How can that be? It’s simple really. There are currently over 500 investment funds in the ESG category. So just like in the non ESG investment fund world, you will find some that do better and some that do worse. Want to write a story about how green investments perform worse? Pick some bad ones and run your test. Want to write a story about how they do better? Do the opposite.

We would contend that the true point of green investing is actually that the entire point of sustainable investing is NOT to earn as much return as possible. This can be a hard concept for people to grasp. It’s the reason why countless people still pen op-eds about how green investing will hurt performance. They write about performance because they fail to grasp that the people backing green investing don’t have investment returns as the top priority.

DIVERSIFICATION

Critics argue that because green investing funds avoid certain industries like Fossil Fuels, chemical production, and other harmful practices, a green portfolio will thus be less diversified than a standard portfolio. A less diversified portfolio will be subject to greater volatility amid swings in the market. Therefor if you are a risk averse person you should avoid ESG or green investing.

This critique is about 50% true. Green portfolios will in fact exclude various industries and that does theoretically make them less diversified. What the critics generally fail to acknowledge however is that many green portfolios replace industries like fossil fuels with industries like renewable energy. Consider this, renewable energy production grew 12% last year. Fossil fuel production fell 6%. Which of those industries would you rather have diversifying your portfolio?

GREEN INVESTING ISN’T ACTUALLY THAT GREEN

This argument centers on the concept of greenwashing. The ESG investing space is absolutely booming, and investment managers are well aware. This has given rise to countless investment options with various degrees of sustainability all touting themselves s ESG and green. because of the huge incentive for inflows and profits, critics argue that many if not most of the ESG funds available on the market are no greener than their traditional counterparts.

On this last critique, we agree 100%. Greenwashing of investment funds is a huge problem in the ESG investing space. There is often little to no transparency with what the investment parameters and objectives are, investors are simply left to trust that the fund managers will invest in accordance with their personal morals and beliefs. This problem is a big part of the reason for why we started Balanced Capital. We wanted to offer investors a way to invest sustainably with complete transparency about how the portfolios are built, and what the goals are.