Patrick Geddes

… learn what to do about it

ESG investing has taken quite a wild ride over the past 20 years.

 It first suffered outsider status and was frequently dismissed by the investment establishment as a flaky and costly if well-intentioned approach to investing.

Within the last five to ten years it has achieved greater legitimacy and certainly attracted many more investment assets.

Finally, within the past year or two it has turned into a bugbear for some politicians eager for ammunition in the culture wars, particularly in the United States.


Unfortunately, different actors over the past two decades have projected their own longings and fears onto ESG investing. This has led to the truth getting pretty badly beaten up by both advocates and critics of ESG.

On top of that, the investment industry, in an eager effort to generate more revenue, has pandered to the worst instincts of ESG consumers by often promising them more than can be reasonably expected.

Let’s examine the types of such abuse of the truth by three different groups:

1) ESG advocates who claim they’re doing God’s work

2) an investment industry that can at times behave like a wolf in sheep’s clothing, and

3) culture war politicians who all but imply that ESG is the work of the devil.

Abuse of the Truth #1: ESG Advocates Doing God’s Work

Those who advocate for ESG investing generally bring two main motivations to their investment choices:

1) the desire to have their portfolios reflect their values and maybe to feel that they may be effecting some positive change in capitalism, and

2) the longing to show how ESG will lead to outperforming the market, e.g., to earn what investment professionals call “alpha”, the amount by which a stock investment outperforms the stock market as a whole.

The first of these two motives — the longing to align one’s portfolio with one’s values — reflects a human feeling, and is therefore less about hard data on performance.

The second, however, can be measured.

‘Active’ vs ‘passive’ investing

Setting ESG aside for a moment, all investors in stocks face the choice of whether to opt for “active” investing or broadly diversified “indexing” (also called “passive”). In “active” investing an investor tries, directly or through hiring a manager, to outperform the market. Research over many decades has shown how on average active management earns lower returns, a function of higher fees and the costs of excessive trading[i].

While all investors may fall prey to the seductive allure of beating the market, for ESG investors it can prove particularly troublesome.  The longing to outperform can get tangled up in the passion around ESG issues such as trying to build a form of capitalism that’s not as destructive to the environment.

The impact of climate change

It seems quite obvious that climate change, for example, will affect the stock prices of different companies in varied ways. Much active stock analysis already incorporates some ESG issues and will likely include more in the future.

However, knowing that ESG issues like climate change will dominate economic choices in the future does not mean that the stocks of the best ESG companies will perform better, since those issues may already be priced into current valuations.

Furthermore, even if ESG research were to lead to better performance, soon all active managers would learn to incorporate it, and it would no longer remain a unique advantage for early investors.

This phenomenon has played out repeatedly over the past decades.  While a new angle on picking stocks may lead to better performance temporarily, all active managers will start to price in the new method, making any advantage eventually disappear.

Thus, the longing for justification can lead to ESG investors thinking they’ll be rewarded for doing God’s work by investing in the most ethical companies. In fact, they may be making poor investment choices by paying excessive fees for the promise of active management which on average has historically made investors financially worse off.

Abuse of the Truth #2: The Investment Industry Can Behave Like a Wolf in Sheep’s Clothing

Active management in all its forms almost always means higher revenue for the investment industry. So those selling various investment strategies are subject to a strong incentive to encourage the most expensive forms of investing, and ESG can provide a terrific way to boost fees.

This longing for higher fees has overcome earlier industry skepticism toward ESG.

But in my personal experience, that skepticism still exists among investment advisors, but it has simply gone underground because of economic self-interest.

The issue of greenwashing…

Now that ESG investing has become so prevalent, suddenly much of the investment industry has embraced it, but not always for the right reasons. With increased focus on ESG issues, many companies engage in greenwashing, the practice of wrapping yourself up in what sounds like environmentally or socially progressive language while still engaging in the same harmful practices, but with a new PR spin.

You might think I sound too cynical about those peddling ESG investment strategies that may not be all they’re cranked up to be, but I’m not alone. On 9 April 2021, the SEC’s Division of Examinations issued a Risk Alert warning about “unsubstantiated or otherwise potentially misleading claims regarding ESG investing” it had observed. 

Such greenwashing reminds me of advertising in the food industry, which has eagerly pounced on the opportunity to cater to a perceived demand for healthier eating, but while still making lots of money selling unhealthy fare that consumers still demand.

…and yogurt

Food marketers understand this dynamic well, such as when they sell yogurt (which sounds healthy) to parents of young children by packing it with sugar (not so healthy) to ensure the kids will like the product.

I’ve heard one skeptic describe yogurt targeted at children as a “sugar delivery mechanism” —  much the same way cigarettes have been designed as “nicotine delivery mechanisms”.

Similarly, some less honourable companies and investment advisors have now seen the monetary benefit of appearing to do well by ESG standards, the equivalent of seeming to offer healthy eating choices.

ESG investors should not dismiss all ESG strategies as disreputable. Plenty provide excellent choices and avoid distorting the truth about what they offer.

However, the more unscrupulous players in the investment industry frequently behave like a wolf in sheep’s clothing, assuring investors they’re offering ethical choices when in fact they simply fatten up the revenue of those selling the strategies.

Abuse of the Truth #3: Politicians and Culture Warriors Labelling ESG as Satan’s Handiwork

The first veto of President Biden’s administration came in March 2023, when he rejected a piece of legislation that would effectively ban ESG investing in retirement plans. Senator Mitch McConnell of Kentucky opined that allowing ESG as a part of investment research would harm “American workers, [and fail to ensure] the best returns for their own retirements.”

In general, political statements can be tricky to interpret, and there are valid points in objections from conservatives, such as ESG potentially leading to political change. As is the case with all sides of political debates, though, tactics that support one’s own position are generally viewed favourably, while tactics used by the other side are often perceived as violating the rules.

Conservative opinion writers have joined in with harsh criticism of ESG investing. An editorial columnist in the Wall Street Journal dismisses ESG as a “foolish enterprise”[ii].

As is often the case in any passionate debate, both sides bring some elements of the truth, in this case picking on ESG funds for charging such high fees. That criticism is spot on, as investment fees are statistically the most correlated with low performance.  Active ESG funds tend to charge higher fees, though indexed versions covering the whole stock market are often much cheaper.

However, the WSJ author also assures you you’ll earn a lower return — not always necessarily the case. Unlike the columnist or the Senate Minority leader, I’ve actually crunched the numbers and published research on how carefully constructed ESG portfolios do not produce lower returns of any significance if the fees are comparable. (I also warn ESG investors about all of these traps in my 2022 book Transparent Investing.)

In criticizing ESG investing, politicians sometimes accuse Wall Street of being excessively “woke”, whatever that means. I would dispute that characterization.  In fact, the worst players are just being greedy and not entirely honest, rather than “politically correct”. Furthermore, there’s an irony about the efforts to ban ESG investing coming from politicians who would normally be perceived as champions of a capitalism that relies on free choice. By banning opportunities for ESG investing, politicians are in fact restricting consumer choice, a violation of the principles of free markets they usually criticize when such proposals emerge from the other side of the political aisle.

In spite of that contradiction, some criticisms of ESG remain valid, namely the tendency for higher fees and the kind of misleading ESG marketing that the SEC cites. Nonetheless, the most passionate rhetoric about ESG alleging it jeopardizes returns seems to imply that the devil must be behind this effort to impoverish investors and undermine the American way of life — once again not a view well-grounded in research.

What’s the truth about ESG, and how would a prudent investor act?

Like almost all investing, ESG has a lot of noise around the data that makes it hard to glean the actual impact on performance. In reality, ESG investing is not the financial windfall its advocates pretend is there. But nor is it sure to bring lower returns as its critics claim. Unfortunately for the truth, so many parties’ longings and fears gum up the reality. As humans we long to have reality confirm our belief systems even if the evidence isn’t there. To ground analysis more in the rational, securities law often references the concept of a “Prudent Investor,” who carefully weighs evidence (rather than falls for hyperbole) and makes wise choices, understanding what types of risk and return can be controlled. And that’s how smart ESG investors should act.

ESG advocates, the investment industry, and politicians/cultural warriors would all do better by relying more on actual data and less on their own passions or greed, which can lead them to spin narratives to fit their own longings and fears. To avoid getting swayed by narratives not always grounded in evidence, ESG investors need to be cautious about their own biases as well as the incentives of anyone offering them advice or assuring them of what’s in their own best interests.

As I indicated in my book for non-professional and novice investors, “If you want to incorporate ESG values into your portfolio, you’ll need to bring the same wariness to your analysis that you do for non-ESG investing. First, focus on the fees, and ask yourself if you have to pay a lot of extra money just to incorporate your values. Many low-cost index strategies provide ESG values, so default to those as you investigate your choices. Also, be sure that anyone selling you ESG isn’t promising market-beating returns.”

Patrick Geddes is the former CEO of Aperio Group, a leading asset management firm he co-founded. It had $42 billion under management at the end of 2020 when it was bought by a major US investment firm when Patrick and his partner gave up running the company. “I helped invent customized indexing solutions while incorporating investors’ specific environmental, social, and governance issues,” he explains. “During that time, almost no one else in the industry bothered to focus on investment returns after taxes.” He spent 21 years at Aperio as its Chief Executive Officer. In semi-“retirement” Patrick published his lessons for ordinary consumers as “Transparent Investing: How to Play the Stock Market without Getting Played”. It’s available in an Amazon Kindle version for only $3 or so. “All net revenues — including proceeds from sales of the book, speaking fees or other income — will be donated to nonprofits focused on financial education,” he has promised, and has already donated over $300,000 to this end. His website,, offers free resources, such as a chapter from his book on whether to hire a financial adviser, case studies, a portfolio organizer, and recommendations for the best investments right now.

Read more about Patrick’s advice at Global-Geneva: ‘Your brain is hazardous to your wealth’.

Explore ESG and its ‘aggregate confusion’ (LINK).

[i] SPIVA 2020 U.S. Scorecard from S&P Dow Jones or Holmes, Millicent, “Improved Study Finds Index Management Usually Outperforms Active Management,” Journal of Financial Planning, January 2007 (LINK)

[ii]John Howell, Principal, Greenland Communications. The failed promise of ESG and the Wall Street Journal: ESG strategies and green bond products have been dismissed as meaningless efforts to address climate change. 9 March 2022 (LINK)

Related news

Mon Argent. Invest in sustainability funds without being had. The Swiss-French money magazine gives its lead story its latest edition (October 2023) to ESGs and “Investir dans les fonds durable sans se faire avoir” (8fr for 1 month’s access). It looks at 3 prestigious Swiss investment vehicles and notes all three invest put money into CO2 producers, whether oil companies or a major extraction business while promoting their ESG profile. It also notes how much easier Swiss rules are on “green” companies than the EU’s. Mon Argent’s advice (viewable on the free chart): look at the prospectus to see where the investment fund puts its (and potentially your) money.

Financial Times. ESG ratings: whose interests do they serve? Regulators and politicians are focusing on the accuracy, transparency and potential for conflicts of interest with sustainability scores. 3 October 2023 (LINK):

“ESG ratings look and sound like the familiar credit ratings produced by S&P, Fitch or Moody’s. In reality, there are two crucial differences: analysts are not yet subject to regulatory scrutiny on conflicts of interest, and they work in part on unaudited environmental, social and governance data, rather than in audited financial statements.” Only 5% of funds align with the 1.5C Paris goals on climate.

CNBC. ‘Not just money and math’: Young people are willing to sacrifice returns for ESG. 27 August 2023 (LINK)


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