Environmental, social and governance (ESG) funds are coming of age. Fund network Calastone says that UK-based ESG funds saw £362m of inflows in July, a new monthly record. Investors have added £1.2bn to ESG investments since April, a figure “greater than all the previous five years combined”.
One concern about ESG investing is that by excluding parts of the investment universe (such as tobacco stocks) investors are impairing their returns. Yet S&P Global Market Intelligence found that of 17 American ESG-orientated exchange traded and mutual funds, 14 enjoyed higher returns than the S&P 500 in the first seven months of 2020. Low exposure to energy stocks, hit hard by crashing oil prices, helps explain why.
ESG returns have also been driven by the outperformance of big tech stocks, says Camilla Hodgson in the Financial Times. Most of the top US ESG funds have either Apple, Amazon or Microsoft as their biggest holding.
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As the tech giants have been dogged by controversies over “data privacy, labour practices and monopolistic behaviour” some question just how ‘ethical’ these investments really are. Yet other ESG funds refuse to hold Apple or Facebook at all. That inconsistency is a reminder that the ESG label says little about what is in a fund. If you want to know exactly where your cash is going, there is no substitute for doing your own research.
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