Socially responsible investment lies?

David MoonBlog

A company in California, Prime Roots, has a new product, Hickory Koji-Bacon, the main ingredients of which are koji culture, coconut oil and yeast. Call me old fashioned, but bacon is made from a slaughtered animal, usually a pig. “Vegetarian bacon” is an oxymoron. Somebody made up the phrase to accomplish a marketing goal.

There is a new category of mutual funds, aimed at investors who want to be socially responsible with their money. These funds do the reverse of Prime Roots, selling people old fashioned pork bacon while calling it broccoli.

One of the top performing ESG funds in 2022 was the Alken Socially Responsible Europe Fund, which trounced 97% of its peer group by investing heavily in defense company stocks, all of which have benefitted from the war in Ukraine. I’m guessing that most people who intentionally select a fund for social reasons don’t immediately assume they will be invested in companies that make laser guided missiles. When asked to explain the fund’s investment in weapons manufacturers, Alken founder Nicolas Walewski explained, “it is socially responsible to defend our country, and you can’t defend a country with flowers.”

One of the largest ESG exchange traded funds is the Vanguard ESG US Stock ETF. Its largest holdings include Apple, Microsoft, Alphabet (Google), Meta (Facebook), and JPMorgan Chase. Further down the list of holdings for this ESG fund are all the major automobile companies, every large airline and a bunch of coal and timber mining companies. It owns Carnival, whose ships each have the environmental impact of 12,000 cars – not to mention charges that the company illegally released 500,000 gallons of raw sewage. It owns investment banks that have been fined billions of dollars in 2023 for various forms of corporate malfeasance.

Solar energy companies comprise less than one-half percent of the fund’s investments, compared to 15 percent of the fund’s assets that are invested in drug companies.

Among the almost 1,500 stocks in the fund’s portfolio is a little bit of everything, which makes sense, since Vanguard’s CEO recently said that ESG investing has zero advantage over broad based investing. So they own everything and call it ESG.

It doesn’t matter if a fund claiming to pursue some social outcome actually achieves that outcome. What matters most to the fund companies is that they convince good-intentioned people to buy their funds – and then simply not perform too dissimilarly from everyone else – which is why these funds own a little of everything.

If you have 3 dogs and call one of them a cat, how many dogs do you have left? Three, because calling a cat a dog doesn’t make it a dog.

David Moon is president of Moon Capital Management. A version of this piece originally appeared in the USA TODAY NETWORK.