Are ESG funds holding the right companies?

A lot of ESG fund managers tend to plump for “techy stuff” in their funds. But that's a lazy approach, says Merryn Somerset Webb.

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. 

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? 

Recommended

Energy transition is easier said than done
Renewables

Energy transition is easier said than done

We are on a path to “net zero” carbon emissions, says Edward Chancellor, but fossil fuels will be with us for some time yet.
4 Jul 2022
Changpeng Zhao: Binance founder undaunted by the crypto winter
Bitcoin & crypto

Changpeng Zhao: Binance founder undaunted by the crypto winter

Changpeng Zhao, the founder of controversial cryptocurrency exchange Binance, has been severely battered by carnage in the sector. But the future is b…
3 Jul 2022
Ray Dalio’s shrewd $10bn bet on the collapse of European stocks
European stockmarkets

Ray Dalio’s shrewd $10bn bet on the collapse of European stocks

Ray Dalio’s Bridgewater hedge fund is putting its money on a collapse in European stocks. It’s likely to pay off, says Matthew Lynn.
3 Jul 2022
Just how powerful is artificial intelligence becoming?
Tech stocks

Just how powerful is artificial intelligence becoming?

An uncannily human response from an artificial intelligence program sparked a minor panic last month. But just how powerful are machines getting – and…
2 Jul 2022

Most Popular

UK house prices are definitely cooling off – but are they heading for a fall?
House prices

UK house prices are definitely cooling off – but are they heading for a fall?

UK house prices hit a fresh high in June, but as interest rates start to rise, the market is cooling John Stepek assesses just how much of an effect h…
30 Jun 2022
How to invest in copper, the most important metal in the world
Industrial metals

How to invest in copper, the most important metal in the world

As the world looks to electrify and try to move away from fossil fuels, copper looks set to be the biggest beneficiary. But how can you invest? Rupert…
30 Jun 2022
Don’t try to time the bottom – start buying good companies now
Investment strategy

Don’t try to time the bottom – start buying good companies now

Markets are having a rough time, so you may be tempted to wait to try to call the bottom and pick up some bargains. But that would be a mistake, says …
1 Jul 2022