In 2020 I published articles on how “ESG” funds were good for marketing, but little else. I wrote, “Frankly, it’s hard to see why the funds are considered green or socially responsible.” Now the SEC and German authorities agree.

Investing based on environmental, social, and governance measures has been very popular as investors increasingly care about the environment and social issues, and they want their investment dollars to go to “good sustainable” firms. The asset management industry has responded by launching its own socially responsible funds. Those funds gathered a lot of assets.

In my earlier article I wrote that Vanguard FTSE Social Index Fund (VFTAX) looked more like a “FANG” fund. Because of its high technology exposure the fund fell 22% from its high. Six out of its eight largest holdings are still large-cap technology stocks. Is Facebook really an environmental company or one with good governance?

Regulators are taking note. In early June the chief executive of Deutsche Bank’s asset management arm, DWS, resigned right after German authorities raided their office amid allegations of misleading ESG fund claims. Separately, the SEC fined Bank of New York Mellon for its own misleading ESG fund claims.

One problem is that what constitutes a “green” company is subjective. Should ESG funds hold BP because it is increasing spending on solar energy or buy Shell because of its carbon capture research? Or should these be avoided because they are oil companies? A standardized ESG scoring system is needed. The European Union is working on such a set of standards and on May 25 the SEC announced that they, too, want greater transparency and accountability to sustainable investing.

For environmentally conscious investors my recommendation is to look past ESG funds and buy green sector funds instead. Invesco Solar ETF (TAN) rallied on Monday after President Biden announced a 24-month tariff exemption for solar panels that come from Southeast Asian countries. There is also First Trust Global Wind ETF (FAN) and First Trust Nasdaq Clean Edge Green Energy ETF (QCLN). For those who simply don’t want to own energy stocks then consider ProShares S&P 500 Ex-Energy ETF (SPXE). Keep in mind, though, that this year energy is the only sector that is doing well.

Buying an ESG fund might feel good, but know where your money is going. Before buying, look at the fund’s largest stock holdings to see if they reflect your values. In many cases probably not.

David Vomund is an Incline Village-based Independent Investment Advisor. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.