Green labels

Sustainable, responsible, green, ESG funds. Labels multiply. But what do they really guarantee?

It all starts with three letters: ESG. Environmental, social, governance.

Environmental: emissions, pollution, water. Social: employees, suppliers, safety. Governance: how the company is run.

Agencies give a score on these three criteria. And funds use it to choose their companies.

The problem: everyone defined sustainable their own way. So Europe wanted a common definition.

That is the European taxonomy, adopted in two thousand twenty. A list of activities deemed sustainable, with precise criteria.

It sets six environmental goals, including limiting warming and adapting to it. An activity must contribute, without harming the others.

Even this definition was debated. In two thousand twenty-two, gas and nuclear were included, under conditions.

In France, the state also created the SRI label in two thousand sixteen, for socially responsible investment. Its criteria have since been tightened.

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And then there is greenwashing. A fund calls itself green, but is not, or much less than it claims.

In two thousand twenty-three, the American market regulator fined DWS, Deutsche Bank's asset manager, nineteen million dollars.

The reason: presenting its ESG criteria as stricter than they really were.

Greenwashing is not always a lie. Often, it is an ambitious name stuck on a very ordinary fund.

Last trap, the most surprising: the scores themselves do not agree with each other.

For credit, rating agencies almost always give the same rating. An MIT study measured their agreement: almost perfect.

For ESG, the same study compared six agencies. Their scores agree barely more than one time in two.

The same company can be excellent for one, and mediocre for another. It all depends on what is measured, and how it is weighted.

The twist: in May two thousand twenty-two, Tesla was removed from a major ESG index. ExxonMobil stayed in.

An electric car maker out, an oil giant kept. Because the score also measured governance and social issues.

So an ESG score does not say whether a company is good for the planet. It says how it manages its risks, according to one agency.

To judge a fund, do not stop at the name. Open the list of its biggest holdings.

If you find what you wanted to avoid, the label does not protect you.

Also ask which label it carries, and what that label really excludes. Some exclude a lot, others almost nothing.

A label is a starting point, not a guarantee. A fund's real content is its list of holdings.