Jul. 09, 2022
The regulation should include a requirement for fund managers of mutual funds to make clear that when investors give money to a fund, their cash flows are used to buy shares from other investors. They are not ending up with the companies in the fund to finance \"green\" initiatives. Casual experience has made it clear to me that many investors wrongly believe otherwise : when they invest in the \"Green Energy Fund\" they wrongly believe that they give money to companies in the fund to invest in green energy. In other words, they confuse investing in secondary markets (listed stocks) with investing in primary markets (financing capital expenditures of the issuer). Moreover funds that exclude say low ESG stocks do not affect the excluded companies carbon footprint. So I would suggest a required statement in every prospectus: \"Your investment will not be used by the companies in the fund so their carbon footprint (or climate change), is not affected by your decision to invest in the fund\" Some fund managers may argue that the cost of capital of green companies falls as a result of investor demand for high ESG rated funds. But then they should also point out that the expected rate of return on the fund will be lower than the expected rate of return of funds with low ESG ratings. So a second warning in the prospectus should be : \"To the extent investors like high ESG stocks (funds) for other reasons than economic fundamentals, your return is likely to be less than returns offered by low ESG stocks (funds)\" Thanks for considering my comments. Academics were blamed after the 2008 crisis for not warning their students and others about the bad practices of the financial services industry. The ESG fund industry is in my view another example of such bad practice : exploiting the hype about climate change to charge high fees for providing non-existing benefits (saving the planet, earning abnormal returns)