ESG Is the Big Con: Big Returns for Insiders, None for You!

According to a new Harvard study, “the average ESG fund, the effective fees can be three times what’s reported.” This means, on average, ESG funds have 68% of their assets invested in “the exact same” holdings as non-ESG funds.So, for every dollar invested in an ESG fund, a little less than a third goes into stocks you could have gotten in a fund that isn’t ESG. Click here for study. The reason for this is that ESG funds are nowhere near as pure as they look to be.

Finance professor Malcolm Baker of Harvard Business School, one of the study’s authors, said, “Although only about a third of your money in the average ESG fund is distinctly green, you incur the fees on the entire portfolio. Therefore, you’re really paying three times as much for the thing you care about, the differentiated piece of the portfolio.”

ESG Fees

Asset managers saw fee income from sustainable bond and equity funds multiply in 2022, with the former generating the largest revenue increase in percentage terms, and fee income swelling 384 percent to $215 million, according to a Fitz Partners estimate for Financial News.

That was accompanied by a 343 percent increase in the average assets under management of sustainable bond funds, the report adds. The high fees that ESG bond funds generated are in stark contrast to non-ESG fixed-income products.

Traditional bond funds brought in $3.3 billion last year, down nearly 6 percent from 2021, according to the survey which analyzed over 3,500 European funds, excluding ETFs.

The average ESG U.S. stock ETF charges 0.17% in annual fees, according to Morningstar, 0.05 percentage points more than non-ESG funds.

Market Carnage

ESG equity funds also brought asset managers strong returns in 2022 with a 291 percent increase to $1.3 billion. Meanwhile, traditional equity funds saw a more modest 33 percent increase in returns to $7.2 billion. Average assets under management in these funds increased by about a third.

Amid the generalized market carnage in 2022, ESG funds suffered far less and continued to attract new inflows that targeted the bargains thrown up by choppy markets, Amin Rajan CEO of Create Research is quoted as saying.

The bear market has burnished the credentials of ESG investing, rather than dented them, as critics had expected.

Tax Deductions for the Wealthy

For decades, the wealthy have been able to see huge tax savings. Over one hundred years ago, investors could take tax deductions on wash sales, which involved selling a security at a loss and then buying back the same security.

While Congress outlawed that technique in 1921, investment firms have continued to help billionaires save on taxes through other techniques such as tax-loss harvesting, which allows an investor to sell an investment for a loss and replace it with a reasonably similar investment.

Direct indexing, which continues to gain steam among advisors, provides the perfect strategy to employ tax-loss harvesting. In a recent article, ProPublica authors Paul Kiel and Jeff Ernsthausen reported on the tax savings techniques of billionaires.

The authors were able to reconstruct the tax-loss strategies of some of the nation’s wealthiest people using IRS data.

For instance, they estimated that from 2014 through 2018, Goldman Sachs was able to generate tax savings of $138 million for Steve Ballmer, former CEO of Microsoft and current owner of the Los Angeles Clippers, without changing his investment portfolio in any meaningful way.

In the year 2017, Ballmer’s direct indexing accounts posted over $100 million in tax losses through 15 loss-harvesting transactions, while the performance of the indexes it tracked, was way up. Tax records also show that Goldman Sachs routinely made trades for direct-indexing clients like Ballmer.

Lewd Layoffs, Looming Laws and Lingering Loans

On January 10, 2023, Goldman Sachs Asset Management announced that it had closed over $1.6 billion in funding for Horizon Environment & Climate Solutions I (Horizon Climate), the first in an expected series of funds through which Goldman intends to target investments toward “key sustainability trends.”

On January 11, 2023, Goldman Sachs announced it was laying off roughly 3,200 employees after “dealmaking slowed over the last two years”.

On January 27,2023. New York City Mayor Eric Adams announced a new partnership with Goldman Sachs Group Inc. and Mastercard Inc. that will create the largest public-private loan fund for small businesses in the city’s history.

The $75 million NYC Small Business Opportunity Fund will offer businesses loans ranging from $2,000 to $250,000 at a fixed below-market interest rate of 4%, regardless of the loan size. The program comes as many small businesses that struggled to stay open during the pandemic are still fighting to bounce back.

“Small businesses throughout our city have been disproportionately impacted by the Covid-19 pandemic, and helping them get back on their feet is critical to an equitable recovery,” Adams said in a statement.

More than 4,000 private businesses, including chain stores and retail banks, shuttered in New York from 2019 to 2021 during the height of the pandemic, the city comptroller’s office said. About 1,500 local businesses will be able to apply for the new loans, exempt from credit score minimums and application fees, according to the city.

According to The Washington Post:

Christine Noh, owner of the apparel store Nohble, which was founded in 1982 by her parents, said the past three years have been a tremendous challenge. Noh said she feels like she is constantly trying to recover from whiplash. Although she received a loan from a city program designed to keep businesses afloat during the pandemic, she told Bloomberg in an interview that she plans to apply for the new loan.

“New York City is a very challenging place to operate, and it only gets more expensive to operate, it never gets cheaper and more of this is needed, I would say I am somebody who is very well engaged and even then, I don’t necessarily know what products are being offered or what programs may exist,” Noh said.

To qualify for the loan, businesses must have less than $5 million in revenue. Borrowers can also use the loan to refinance higher-interest debt.

Goldman Sachs is contributing approximately $50 million to the loan program, while Mastercard is giving $500,000 for outreach and educating small business owners. The balance of the program’s funds will come from New York City. The partnership will also work with local groups including Community Reinvestment Fund and local Community Development Financial Institutions, which are dedicated to serving low-income people or businesses.

“Small businesses are the engines of our economy,” Maria Torres-Springer, deputy mayor for economic and workforce development, said in a statement. “This innovative public-private partnership will not just help over one thousand businesses, but will have lasting ripple effects in the lives of workers and in the health of our neighborhoods where these businesses operate.”

While many are confused by the current marketplace and it’s conflicting behaviors, others are seeing the invisible hand pushing the evolution that is happening right before our eyes.

JTC said this week that private equity industry is not suffering a significant downturn prompted by investors turning to more traditional asset classes – in spite of higher interest rates leading to real returns being generated by bond portfolios for the first time in a decade.

The past decade or more has seen a flood of money into private equity, venture capital, private credit and forms of property as investors have sought yields in a time of ultra-low or even negative interest rates.

One of the main reasons they’ve been willing to hold fewer liquid assets is because yields on government bonds and equities got squeezed. Another example of the governments manipulating and manufacturing the marketplace.

This is important to note, because as interest rates have started rising to curb inflation, some of those considerations have shifted.

In conclusion, the only safe bet at this time is to know there ain’t nothing new under the sun. The United States just pumped well over $6 trillion dollars into the global economy so it isn’t going anywhere anytime soon. You or your business might, but the economy and its leaders aren’t, they’re just managing the evolution of the New ESG World.