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What I Care About This Week | 2022 July 5

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Photo by Stanislav Kondratiev on Pexels.com

by Franklin J. Parker, CFA

The Summary

The Details

There is a controversy silently brewing between the investment management industry and regulators. “Greenwashing” has become a real, and not often talked about, problem.

With ESG investing (Environmental, social, and governance investing) becoming more popular, regulators have begun to take notice of funds and investment managers that make claims to the investing style, but do not back up their actions with the claims. “Greenwashing” is the term that describes an investment strategy that claims to have an ESG mandate, but whose holdings are indistinguishable from a non-ESG mandate. It can also refer to an investment process that has a marketing banner of ESG, but does not, in fact, consider any ESG factors in the security selection process.

The challenge, of course, is that there is no standard definition for ESG investing. Because ESG investing is very personal, I doubt a standard definition ever could exist. For example, one investor might include Tesla in an ESG strategy because of its positive environmental impact, while another might exclude Tesla because of its poor social or governance components. The point is: every investor values each ESG component separately, belying any attempt to codify the practice across the industry.

Recently, regulators in Germany outright raided Deutsche Bank’s asset management unit on allegations of greenwashing. The SEC recently proposed two new rules to combat it.

More than anything, securities regulators do not like lying. If a firm says they are running an ESG strategy, they had better be able to prove in court that they are running an ESG strategy. Regulators are even more apt to ensure investors are getting what they pay for since the average ESG fund is almost 50% more expensive than the average investment fund.

I believe that investors should consider their ethical investment goals just as carefully as their financial goals. Just as with all goals, these are very personal undertakings, and when tradeoffs exist, those tradeoffs should be carefully considered. In the end, it is incumbent on us, investors and advisors, to navigate these waters and to do our due diligence!

Chart of the Week

Capacity utilization is, in theory, a measure of how much of its potential economic capacity the US is using. A little-talked about figure, it can give some insight into the underlying fundamentals of the economy. Other than 2008 (which was a financial-driven recession), this figure tends to decline leading into recessions. At the moment, it is at its highest levels in over 15 years.

This is an odd economic environment, to be sure. I am cautious to rely too heavily on indicators that worked pre-2020 as I believe post-2020 is a different paradigm. Even so, the underlying economy appears to be fairly robust, despite the headlines.

This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature or other purpose in any jurisdiction, nor is it a commitment from Directional Advisors to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical and for illustration purposes only. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and determine, together with their own financial professionals, if any investment mentioned herein is believed to be appropriate to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.

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