The Biggest Fad On Wall Street… Is It A Sham?
We need to talk about Wall Street’s favorite buzzword.
And no, I’m not talking about AI. While that one certainly has a lot of hype around it, the term I’m referring to has been around even longer.
I’m talking about ESG.
This has become a hot topic lately. And everyone seems to have an opinion on it. But before you make any assumptions about what I’m going to say, just stick with me…
Is “ESG” A Sham?
If you’re not familiar, ESG stands for Environmental, Social, and Governance. It’s a relatively new talking point for publicly traded stocks. It’s also a centerpiece of institutional investment strategies everywhere.
It’s a buzzword that’s gained so much traction that entire ETFs and mutual funds are dedicated to this movement. In fact, in 2017 — when ESG was barely a thing — the ESG ETF market had less than $50 billion in global assets. Last year, the ESG ETF market was worth over $400 billion. And this Bloomberg article states Global ESG assets are on track to exceed $53 trillion by 2025.
To say the least, that’s phenomenal growth.
And before I go any further, I want to make one thing clear.
I think it’s commendable that companies are committing to lowering their carbon footprint, having better gender equality, and including under-represented minority groups (parts of the “social and governance” of ESG). Those are things most of us should be able to agree on.
But companies are trying too hard to tie themselves to the ESG movement. That’s because they’re competing for institutional investment dollars (like state pension funds, for example) with so-called ESG mandates. And because it’s become so popular, companies have pulled out all the stops to become known as ESG. Flip through any company’s investor presentation, and there will be a section on how environmentally friendly or socially responsible they are.
So much so that it’s become a little ridiculous.
If that were the end of it, I would just roll my eyes and move on. But what I really don’t like is companies using ESG to fool investors (even with outright “clean energy” scams).
This is something that’s happening a lot. And we need to talk about it.
Let me give you a couple of examples of what I’m talking about…
The Nonsense IPO That Destroyed Investor Capital
For example, Allbirds (Nasdaq: BIRD), a shoe company, was so intent on working the ESG angle that it tried to create a new form of IPO when it went public in late 2021.
The company claimed its offering should be known as a “sustainable public equity offering” or “SPO.” Allbirds later killed the idea, though they didn’t explain why.
The company hasn’t let go of its commitment to ESG. One look at their website, and you’ll see an ad for the “World’s First Net Zero Carbon Shoe.” Although it looks more like a high-ankle slipper to me…
Now look, I’m not here to judge the shoes on your feet. And while Allbirds might have the first net zero carbon shoe… I’m sure at this point, investors could care less about how environmentally friendly the company wants to be… they probably just want their money back.
Now to be fair, the apparel and shoe industry is tough. Companies like Allbirds create a shoe that’s a short-lived fad, go public, and then realize that consumers have moved on. They’ve gone back to buying their favorite pair of Nikes.
So, let me give you another example of a company that hid behind the ESG moniker and fooled investors…
The “ESG” Company Clearcutting Our Forests
A couple of years ago, I came across a ticker symbol that I found interesting as I dug deeper. The ESG buzzword (Environmental, Social, Governance) was beginning to take off, and ESG-related stocks were doing well.
On the surface, this company was an eco-friendly “biomass” company. It claimed to pick up scrap wood, loose limbs, and other “wood waste” and then recycle those bits and pieces into eco-friendly wood pellet fuel.
Its website even touted, “Displace Coal. Grow More Trees. Fight Climate Change.” Meanwhile, it was secretly cutting down huge swaths of native forest to generate “zero-emission” fuel.
For further research, I scribbled its ticker symbol, “EVA,” on my whiteboard. The stock was performing well, and the financials looked great. It was coming off a year (2020) when it had just grown sales 28% and produced $125 million in operating cash flow — 113% increase over the previous year.
It was a smaller company (under $2 billion market value). And I thought I had found a real gem. Here was a small company generating robust cash flow. It was saying all the right things to hop on the ESG bandwagon. And it even paid a dividend.
Last fall, the company, Enviva (NYSE: EVA), was exposed. In October 2022, an activist short seller, Blue Orca Capital, released a searing report on how Enviva was “the latest ESG farce.” And it was “engaging in textbook greenwashing.”
The term “greenwashing” means fudging sustainability practices to turn an extra profit. It was coined in the 1980s by environmentalist Jay Westerveld.
It turns out, Enviva wasn’t exactly picking up sticks and limbs out in the forest to turn into wood pellets. It was harvesting 70%-90% of the trees from various wooded areas. The company didn’t even bother to replant, either. The land either sat vacant or was sold to housing developers.
Enviva’s lie was only the tip of the iceberg. It turns out the whole “biomass” industry is a bit of a scam.
As Blue Orca explained:
“Enviva’s business model is an ESG farce built on a carbon accounting loophole. At a high level, Enviva harvests wood and other biomass from forests in the Southeastern United States for conversion into wood pellets at Enviva’s manufacturing facilities. These pellets are then shipped mainly to Europe, where European power producers burn the wood to produce electricity.
International climate treaties include a grandfathered provision of the Kyoto Protocol classifying the burning of forest biomass as a “renewable” energy source under limited circumstances, and this controversial loophole has allowed a burgeoning industry of deforesting biomass to masquerade as a zero-emission energy source. Countries, principally in Europe and Asia, have taken advantage of this loophole, burning wood instead of coal to meet emissions targets.
These countries dole out subsidies in the form of carbon credits for switching to wood burning, even though wood pellets emit more CO2 per unit of heat generated than any other widely used fuel source, including coal.”
Since Blue Orca published its short report on Enviva in October 2022, the company’s shares have tumbled by over 80%. It turns out “biomass” had nothing to do with clean energy…
As luck would have it, neither of these stocks ever made their way into the pages of my premium services or my brokerage account.
Sometimes, the best investments are the ones you don’t make.
I don’t want to sound cynical, but you should be wary of some of these so-called ESG-friendly stocks. The two examples I covered today aren’t the only ones out there. (Not to mention the giant companies who merely talk a good game when it comes to ESG…)
Just remember this. When something like ESG comes around (or AI, or whatever tomorrow’s investing fad will be), just because it sounds nice it doesn’t mean it’s going to make you a lot of money. When it comes to investing, if it sounds too good to be true, it probably is.
We all want to leave a better world to our children. But quite frankly, my job isn’t to give you a “socially acceptable” stock. It is to provide you with the best money-making opportunities that I find. It’s up to you whether you want to invest in them.
Editor’s Note: After months of patiently waiting, I just told my premium subscribers why I think cryptocurrencies are about to pop…
That’s because three “blue chip” cryptocurrencies are getting major upgrades this year. And practically all the big names in finance are getting into the game this time around… which means they could unleash a massive crypto boom. This could easily be a once-in-a-lifetime chance to take a small amount and turn it into a life-changing gain.
That’s why I just released a time-sensitive briefing about how you can profit. Get the details here…