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Is the ESG wave sustainable?

10 December 2021

Editor Jonathan Jones looks at the week's main talking point: ESG.

By Jonathan Jones,

Editor, Trustnet

This week the big boys of the asset management world have careened into the ethical seas. Invesco announced it launched a new range of passive funds that will only invest in companies that share the same goals as the Paris Climate Agreement, namely that they will reduce their carbon footprints to a level consistent with a 1.5°C warming pathway.

The day before, Vanguard – the second-largest asset manager in the world – set up a Global Sustainable Equity fund range.

Dzmitry Lipski, head of funds research at interactive investor, said Vanguard had been “slow to embrace a sustainable investing range”.

However, the statistics have proven asset managers can no longer ignore it. Data from Calastone showed that without environmental, social and governance (ESG) funds, investors would have withdrawn £1bn from equity funds in November.

Thankfully for the asset management companies that earn their crust from fees, investors reallocated this into ESG funds, with £1.5bn flowing into sustainable portfolios.

But although the world is turning towards managing money ethically, sustainably, or any other buzz phrase that the industry wants to use, there is a real concern that some could be sticking an ESG label on a fund for the sake of taking in more cash.

It is on the radar of the Financial Conduct Authority, which has launched a consultation on the sector, but, at present the ESG market is like the wild west, with little-to-no regulation on if a fund can call itself sustainable.

It gets worse when looking at individual stocks. Some believe electronic carmaker Tesla, for example, is a beacon of environmental stewardship, yet its chief executive Elon Musk, who last month took to Twitter to poll whether he should sell around 10% of his stake in the company, must surely downgrade it on the governance (or G) part of the equation.

Ratings agencies are also wildly inconsistent. Some score stocks relative to their own sector, but is the most ethical gun company or tobacco stock really in-line with the principles of sustainable investing?

Of course, the actual goal of ESG – to save the planet – is a noble one. Far be it from me to deter people from attempting to make this a reality.

However, when entrusting funds with your cash, whether they be actively picking stocks or passively screening out bad ones, it is almost impossible to know if there is not at least one bad egg in the portfolio.

Boohoo is a classic example of this. Last year the clothes retailer was embroiled in a scandal after it was revealed it was paying workers £3.50 per hour in a factory in Leicester – far below the minimum wage.

ESG funds had owned it, unaware of this issue, but quickly dropped the stock when it was exposed. Still, could they have not done their due diligence in the first place to find out this information?

There is no perfect system, or indeed perfect answer, but there are parts of the market that need to be tightened up and the FCA has a big job on its hands to figure out a solution.

For now, the best investors can do is to research thoroughly, check the underlying holdings in the fund’s annual report and trust that the ratings agencies’ scores are 

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