ESG Investing Pitting Returns Against Ideology

October 25, 2022

When Amare Leslie was a high school senior bagging groceries at the local Kroger for $12 an hour last year, he wasn’t thinking of spending his earnings on a video game—he was more interested in picking stocks.  

Leslie, from Cincinnati, had attended a talk by Vivek Ramaswamy, the activist entrepreneur behind Strive Asset Management, earlier that year at a local convention center. Ramaswamy was promoting his book “Woke, Inc.,” and though Strive had yet to be established, his message was the same: Politics has no place in business. Leslie was hooked, and decided he’d stay in touch with Ramaswamy’s team.

“They had a really interesting message that needed to be heard,” Leslie, now a freshman at Southern Methodist University in Dallas studying economics, told ETF.com. “Strive puts investors first.” 

Leslie recently invested his $300 savings in the Strive U.S. Energy ETF (DRLL) after it launched Aug. 9. The exchange-traded fund has gained about 10% since he bought in, putting about $36 into his pocket. 

Based in Dublin, Ohio, Strive is perhaps best known for its “anti-woke” investing policy and co-founder Ramaswamy’s Squawk Box appearances, where he waved the company’s “profit first” flag and advocated for, as the Strive website says, “the pursuit of excellence over politics in boardrooms across corporate America.”  

Anti-ESG Rhetoric 

Strive, which manages three ETFs, is at the front of a growing movement that rejects environmental, social and governance guidelines in its investing decisions. This has led to recent ETFs like the God Bless America (YALL) and the Point Bridge America First ETF (MAGA), which cater to people seeking profit and right-of-center ideological identification, in perhaps equal measure. 

“When I heard Strive was actually focused on their shareholders and that their mission was to help investors make the most profit, rather than focus on ESG mandates, it was really important to me, as an investor, to pick a company like that,” Leslie said. 

Anti-ESG sentiment is increasingly moving into statehouses and affecting investing decisions from treasurers overseeing billions of dollars in pension and other state funds.  

Earlier in August, 19 Republican state attorneys general penned a joint letter to BlackRock, the largest issuer of ETFs in the U.S., stating the asset manager was not doing its fiduciary duty when using “the hard-earned money of [the] states’ citizens” to forward its “climate agenda” and not prioritizing financial returns.  

BlackRock has reportedly lost more than $1 billion in asset management businesses based in Republican states across the U.S., presumably over the firm’s socially responsible investment approach, which GOP members have criticized to be an erroneous policy impacting profits. 

Bang for the Buck 

Beyond marketing toward a certain ideology, Strive’s goal, presumably, would be to create wealth for the issuer and the investor. Yet the fund starts off a bit more expensive than its peers. 

DRLL tracks the performance of U.S.-listed equities in the energy sector. Its 0.41% expense ratio is more than four times what State Street charges for its Energy Select Sector SPDR Fund (XLE), and nearly five times more than Fidelity Investment’s Fidelity MSCI Energy Index ETF (FENY). Perhaps the ETF’s closest competitor, in terms of fees, is BlackRock’s iShares U.S. Energy ETF (IYE), which charges an expense fee of 0.39%.  

However, according to Strive’s co-founder Anson Frericks, its product fills a “fiduciary gap in the marketplace,” as its only focus is on profit, while competitors like BlackRock and State Street are limited by climate and social governance policies. 

“When you’re a fiduciary for clients, you have to represent the client’s best interest, and that is to maximize profits and returns,” Frericks said.  

“If asset management companies like BlackRock, State Street and Vanguard impose net-zero commitments or abide by the Paris Climate Accord agreement, they are aggregating capital from everyday citizens and voting for certain policies that are contrary to the financial interest of these investors,” he added.   

Despite DRLL’s higher fees, Frericks believes that by removing ESG constraints on its product, Strive will be able to provide higher profits and boost shareholder value. Currently, the ETF has $345.4 million in assets under management.   

Leslie is all in: “I chose their mission over their fees.”   

Is ESG Bad for Profits? 

While the pushback against sustainable investing accelerates, with some in the media claiming the practice hurts investors, surveys and data from the past few years paint a different picture. 

A 2022 report published by PwC found that demand for ESG products is soaring, and growth in the sector is expected to outpace the asset and wealth management market as a whole, with ESG assets under management in the U.S. likely to double to $10.5 trillion by 2026. Sixty percent of the U.S. institutional investors surveyed reported that ESG has already resulted in higher yields in their investment performance, compared with non-ESG equivalents.    

Additionally, 81% of the surveyed investors plan to boost their ESG asset allocations over the next two years.   

“ESG is not just good for a company’s stakeholders, its community and our broader society, but also for a company’s bottom line,” Kevin O’Connell, PwC’s global asset and wealth management ESG leader, told ETF.com, “There is a fiduciary duty to maximize financial returns for investors, and ESG is now a part of it.”    

Data shows that not only do sustainable investments boost portfolio values, they also make a case for why putting money in the climate solutions space is beneficial for both the investor and the planet.   

“It’s not just a political or moral debate anymore; the economics are right there,” Dorrit Lowsen, co-founder of Change Finance, told ETF.com. Change Finance issued the AXS Change Finance ESG ETF (CHGX)—the first U.S.-listed carbon neutral ETF. 

“Clean energy sources are cheaper than fossil fuel sources, and we are well along the way towards an energy transition,” she said.  

Lowsen said she believes Strive’s goal of achieving “excellence” would remain unfulfilled until ESG was part of the equation.   

Room for Everyone? 

The growing divide between ESG and anti-ESG may simply reflect the political and ideological entrenchment spreading in the U.S., and a good sales pitch to those concerned doesn’t hurt, experts have said.

“I think people refuse to invest in ESG for ideological reasons, and that will hurt them in the long run,” Lowsen said.    

Tony Fusco, president of Blue Horizon Capital—an investment solutions firm focused on the new energy economy—sees a heavy hand from asset managers’ advertising teams.   

“Much of this is just marketing. It’s a way to differentiate and it’s a way to get capital,” Fusco said. “Many people have strong beliefs and opinions, and it makes perfect sense they’d want to put their dollars into causes they believe in.”   

Fusco said that from a purely investment perspective, investors shouldn’t take a hard stance on one or the other but aim to have a diversified portfolio that provides exposure to both the sustainable investing space and the energy sector.   

“There’s room on the table for everything,” he added. 

  

Contact Zoya Mirza at [email protected] 

 

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