The London Stock Exchange recently celebrated 25 years of its FTSE4Good range of indices, designed to assess and boost corporate “sustainability”. Strictly excluded were firms involved in areas such as tobacco and weapons that were considered controversial. The restrictions quickly expanded to exclude the defence industry, fossil fuels and gambling.
The subsequent rush to ESG (environment, social and governance issues) saw the list broadened to include airlines, mining, alcohol and anything else that offended progressive sensibilities.
For a long time, this seemed to work as investment flows benefited the favoured areas, such as renewable energy. More recently, a heavy weighting in the tech sector – 44% in the FTSE4Good All-World series against 35% in the FTSE All-World index – has helped performance, even if overall the difference compared with broader indices has been negligible.
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But the series for the UK, which has little exposure to technology, shows a worrying pattern for ESG devotees. The FTSE 100 has gained 70% in ten years and the All-Share index 67.5%, but FTSE4Good has managed only 57%. Over five years, FTSE4Good has gained 35% against 46.5% for the FTSE 100 and 38% for the All-Share.
A boom in unethical investing
Shares in British American Tobacco, for example, have appreciated nearly 70% since Bruce Packard wrote about them in MoneyWeek in October 2024, when, in addition, they yielded 9%. Smoking may be in decline, but BAT is moving rapidly into smokeless products, expected to exceed 50% of revenues by 2035.
Imperial Brands has performed less well, but its shares are still up nearly 60% since spring 2024 (when they also yielded 9%), despite a 20% fall since early February.
True, the oil and gas sector had a miserable few years – until the Gulf war pushed up prices. Shell's shares rose more than 30% in the first quarter and are now up 10% year-to-date. BP's shares rose 40% in the first quarter and are up 16% year-to-date. The shares of ExxonMobil, which never sought to reinvent itself as a renewables company, have more than doubled in the last five years and are up 20% this year.
Then the Russian invasion of Ukraine in 2022 caused an abrupt change in attitude towards defence. Since then, the share price of BAE Systems has trebled, although it has traded sideways for the last year due to doubts about the usefulness of much of its hardware in modern conflicts. Rolls-Royce's share price multiplied tenfold in the same time.
Babcock's shares didn't start moving until mid-2023, but are up 250% since. Since the end of 2022, shares in Palantir, hated by progressives for its links to Israel and for delivering strong efficiency gains to the NHS, has multiplied 20-fold in value, even though it is now down 40% from its late 2025 peak.
Gambling firms, on the other hand, have struggled with the transition from the high street to the highly competitive online market. Entain, owners of Ladbrokes and Coral, has fallen 75% since a peak in late 2021, Flutter Entertainment (Paddy Power, Sportsbet and Sky) prospered until a year ago, but has since fallen by two-thirds, while Rank Group (Mecca and Grosvenor Casinos) has been on a downward trend for ten years.
Miners are often excused criticism for the rare metals essential for technology and renewable energy that they extract, but this is only a small part of their business. Most of it is in the dirty business of mining iron ore, aluminium, precious metals and the no-go area of coal. Admittedly, Rio Tinto, up 75% in the last year, exited most of its coal business in 2018, but the proposed merger with Glencore, up 87% in a year and one of the world's largest coal producers and traders, would put it back in.
BHP (up 80% in a year) and Anglo American (up 84%) have significant coal interests, although Anglo American recently sold its Australian coal business. Net-zero evangelists also disapprove of airlines; yet despite the rise in fuel prices, International Airlines is up 51% in a year and 177% in two. EasyJet and Jet2 have traded broadly sideways.
The problem with ESG investing
The conclusion is not that ethical investing has necessarily reduced performance, as it depends on what was bought instead. If that was more technology, that would have concentrated any portfolio in a high-risk area. Opinions about what is and is not ethical vary and change over time, as they have for defence. Tobacco companies are moving to smokeless products; should that not be encouraged?
Mining is a dirty business, but it is an essential part of the global economy. The move to renewable energy, reducing dependence on imports of fossil fuels from some of the most unsavoury and corrupt countries in the world, is surely desirable, but is only possible at the pace allowed by economics, technology and adoption by consumers.
Gambling, whether online or in betting shops, is addictive and impoverishing, but could horse-racing survive without it? Lotteries, described by Samuel Johnson as “a tax on fools”, have paid for many good works.
Restricting the choice of investments available to fund managers makes it harder for them to perform and easier to excuse underperformance. Yet charity trustees who do so risk depriving good causes of much-needed returns. The damage to the businesses they won't invest in is, at best, marginal, but the damage to their cherished causes is very real. Is that really ethical?
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