Opting for ESG – environmental, social and governance – investments should be good for the soul, the planet and the wallet.
Lately, however, this has not been the case.
About $4 trillion is invested in ESG funds worldwide. But performance has been less than life-enhancing, since most do not own the defence, mining and oil companies that have prospered amid the energy crisis and the war in Ukraine.
The MSCI World SRI index of socially-responsible stocks tumbled by 22 per cent last year, in a decline deeper than that of the broadly-based MSCI World Index.
This creates a tricky dilemma for investors who want to see growth but also value ethics and the regeneration of the eco-system.
As well as discontent about performance, there is also concern about fund managers allegedly ‘greenwashing’ – that is, exploiting the ESG label to attract customers. in the US, there are rows about whether companies and fund managers are letting progressive values get in the way of financial decisions.
Here, Terry Smith, of Fundsmith, has blasted Unilever for being too preoccupied with ‘woke’ concerns.
So should investors shun sustainability? Or ought they to bide their time in anticipation that ESG will pay off in the long run?
As an investor in a range of ESG fuNds, with a focus on energy storage and renewables, i am enthused about the benefits that could flow from ‘green tech’, which strives to cut energy consumption in homes, commercial premises and transport. Fathom Consulting calculates that as much as $100trillion will be spent globally on this type of innovation over the next two decades. But I am also braced for further upsets, which Mike Fox, head of sustainable investments at Royal London Asset Management, warns are inevitable.
He says: ‘investors are underestimating some of the headwinds that sustainable funds face in the short term.’
Among the headwinds are those ‘greenwashing’ charges. Shortly before the war in Ukraine, about $8.3billion of supposedly ESG funds were invested in Russian assets. Fortunately, Chancellor Jeremy Hunt is attempting to address the greenwashing deception. As part of his post-Brexit City reforms, ESG ratings providers will be brought under the control of City watchdog the Financial Conduct Authority.
Research shows that many investors think funds should engage with companies to foster reform. But they would also like a great deal more openness about funds’ strategies, such as ’tilting’.
Under this, some of your cash will be invested in companies with distinctly non-green characteristics to boost returns.
Terry Smith, of Fundsmith
A ‘best-in-class’ strategy targets companies that are concentrating more of their efforts on ESG compared with others in their sector, such as BP and Shell, both of which are fast expanding their hydrogen, solar, wind and other renewables divisions.
Big Oil will always be anathema to some, however, which suggests that you should check whether your holdings align with your personal principles.
Some global ESG funds own US tech shares, which will raise a few eyebrows, although some, like me, take a pragmatic view.
For example, the largest holding at CT Responsible global Equity is Apple. Not the most obvious candidate for an ESG fund, perhaps, given its goal of persuading people to buy and upgrade electronic gadgets. I am looking to diversify into Ct Responsible global Equity and other funds recommended by FundCalibre, including ninety One Global Environment and Liontrust Sustainable Future growth.
Peter Michaelis, of Liontrust, says it has just acquired a stake in the US quality control and testing group Agilent technologies, which ensures that ‘the food we eat, the air we breathe and the water we drink does not contain harmful chemicals and contaminants’.
If you are building an ESG section of your portfolio and want similarly inspiring companies, Max Richardson, of investec Wealth, suggests Nvidia, the US semiconductor group.
He also suggests Schneider Electric, whose systems aim to reduce greenhouse emissions from buildings. Schneider, a French company, is best known to UK investors for its recent bid to take over software developer Aveva. Some leading shareholders disliked the deal and Schneider’s links to China. In ESG investing, nothing is simple.