Are ESG funds holding the right companies?

Poor Liontrust. You’d think you could sell pretty much anything these days if you labelled it “green”, “responsible,” “sustainable”, or anything else ESG-related (“environmental, social and governance”, if you didn’t know already). But last week the fund manager had to scrap the launch of its first investment trust – the ESG Trust.

You can blame the difficulty of raising money from UK investors (a few other trusts have failed to launch recently). It may also have been lack of ambition: the trust was looking to raise just £100m – not enough to make it investible for wealth managers.

But these explanations don’t hold enough water. UK investors, notes Numis Securities, invested a net £3.5bn in markets in May. The AIC (which represents investment companies) notes that overall, fund raisings in the sector have been hitting record after record.

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What, then, is the problem? Perhaps, as Patrick Hosking puts it in The Times, “the ESG blancmange is starting to wobble”. One key issue is the definition of sustainable, ESG, or whatever you want to call any one firm’s version of do-goodery. There are hordes of thoughts on this (Hosking mentions 14 different “frameworks”), but no set standards.

The first consequence is that pretty much anything bar fags, oil and gas can be labelled sustainable if you can just find the right framework. The second is that most ESG fund managers tend to make finding the framework easy by going for techy stuff (just seems cleaner, doesn’t it?).

Consider the top holdings of Liontrust’s existing Sustainable Future Global Growth Fund: think Visa, Alphabet, PayPal, Autodesk (a software firm) and Iqvia (a health tech company). You get the picture. All too often ESG just means techy growth stuff. But you can get that kind of portfolio almost anywhere.

Note too that (partly as a result of the recent flood of money into ESG) anything you can easily (for which read “lazily”) shoehorn into your ESG definitions is expensive. Anything you can’t (without having to embrace the grubby nuances of real life) is not.

This brings me neatly to the UK market. Wm Morrison has not often featured in ESG portfolios. It might have been winning awards for sustainable business practices for years. It might have been known for its social responsibility. It might have been cheap – so cheap that US private-equity firms are now fighting over it. But I still don’t know of a single ESG fund that owned it (email me if you do).

UK fund managers are now muttering about it being sold too cheap. But it’s a bit late for that. They should have bought more of it sooner – then it wouldn’t have been cheap in the first place.

There’s more on Morrisons in this week's magazine. But it is time for UK investors (who, despite pouring money into markets as a whole, pulled a net £572m out of the UK in May) to take the huge hints private equity is dropping. This market is cheap; its stocks might not be the fun, fashionable, superficially clean tech stocks the modern fund manager fancies, but they aren’t bad either.

Is Alphabet really morally superior to a good supermarket? I pointed this out on Twitter. Simon French of Panmure Gordon (more from him on the podcast here) responded “Rio Tinto. Yield of 5.5%. P/e of 6. Wrong price.” You won’t find cheap Rio in most ESG funds. But you will find expensive electric car companies that can’t survive without the copper it mines. How does that make sense?