ESG investing you say?

Lately, environmentally friendly investing has been growing in popularity, with every large investment house under the sun rolling out their version of eco-friendly investing. This has been in response to the large rise in interest in ESG, with assets growing by the billions annually.

Further, most institutions expect ESG to continue to grow, and at an accelerating rate.

But, as this FT article (subscription required) points out so well, all is not truthful when it comes to the real holdings of these so-called ESG funds.

The article specifically mentions that the JPMorgan ESG Bond fund holds Saudi Aramco debt, which under no reasonable circumstances can be considered and environmentally or socially conscious. This is one example of many where the name of and marketing of a product do not match up with the reality being delivered.

Take the JPMorgan Intrepid Sustainable Equity Fund , which “looks for companies that thoughtfully approach environmental, social and governance issues with attractive value, quality and momentum characteristics “, as an example. It owns Baker Hughes, National Oilwell Varco, Conoco Phillips, and Valero to name a few. These are all companies that are engaged in oil and gas drilling and development, not exactly at “thoughtful approach” to environmental issues.

Or take the Baywood Socially Responsible Fund , which ” seeks to achieve long-term capital growth by investing in undervalued equity securities while meeting our clients’ environmental, social, and governance screening criteria. ” It owns Schlumberger, Devon Energy and Centennial Resource Development, which is a pure play West-Texas oil producer. Again, makes you wonder what environmental screening criteria they are using that ends up with pure oil extraction being an acceptable investment.

These examples only cover the energy sector, leaving out defense contracting, gun manufacturing, mining, logging and so many more. The point is that it is quite tough, without deep research, to find funds and investments that are truly environmentally responsible, let alone responsible on the social and governance fronts. When you look across the current ESG universe of funds, this problem marketing not matching stock selection is wide spread.

What is the rationale behind thee allocation decisions? My suspicion is that these investment funds are deeply concerned about delivering index-like returns to investors on a year-in, year-out basis. They believe, and I think they are right about this, that most investors want fund returns that look a lot like the index. Advisors like this type of return as well, as it is a whole lot easier to justify investing in something that has returns similar to your favorite index, instead of a fund that is more decoupled from traditional indices. These factors mean that the ESG space will likely continue to give lip service to investing in an environmentally friendly way, whilst trying their best to give investors index-like returns.

Investors should understand that investing in a product that seeks to be different than the larger stock market means the returns they see will also be different than the broader stock market. This doesn’t mean returns will be lower, just that returns will not be in sync with the S&P on a yearly basis.

So, what’s an environmentally concerned investor supposed to do when finding truly ESG funds is so hard? Honestly, either take a huge amount of their own time to research this stuff for themselves or talk to an investment professional that specializes in finding or building portfolios that are more truly ESG.


Nathan Wallace

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