The Dark Side Of Sustainable Investing

The Dark Side Of Sustainable Investing

over 3 years ago2 mins

Mentioned in story

ESG investing approaches – based on environmental, social, and governance factors – have outperformed wider markets during the coronavirus crisis. Ironically, however, that may be largely thanks to their focus on companies creating an unsustainable future… 🌗

What does this mean?

While ‘rona-induced market volatility has led to investor withdrawals in some sectors, ESG exchange-traded funds (ETFs) have only seen two weeks of small overall outflows in 2020. That may be due to the approach’s relative success: companies in index provider MSCI’sESG Leaders” bracket fell less than stock markets in every region of the world last quarter, while rival* ICE’s*Bank of America Green Bond Index” has provided significantly better returns than European investment-grade company bonds in general.

That might be due to investor belief that companies with strong sustainability credentials will be better positioned post-pandemic. But there’s another potential reason, at least when it comes to stocks. Determining whether or not a company qualifies for ESG inclusion is a vexed question, with divergences of opinion potentially undermining efforts to improve working practices (see our Pack on Socially Responsible Investing to learn more). Nevertheless, the biggest US ESG ETFs agree in leaning heavily towards tech and healthcare firms 👨‍💻

The problem is, that means they may simply offer investors a watered-down version of “growth” funds, which – while taking a very different starting point, as readers of our Investment Styles Pack will know – end up focusing on much the same hot stocks.

This major ESG ETF has outperformed US stocks overall while lagging a growth-focused approach
This major ESG ETF has outperformed US stocks overall while lagging a growth-focused approach

Why should I care?

As well as failing to encourage actual holistic sustainability at companies, this state of affairs may actively work_ against_ it. In focusing on their low carbon footprints, the big ESG ETFs overlook the fact that many tech and pharma firms have few formal employees – and therefore reward an approach that, given massive recent increases in unemployment, risks deepening societal inequality 🙃

Is Facebook a force for good? (Source: INTL FCStone)
Is Facebook a force for good? (Source: INTL FCStone)

ESG’s outperformance could therefore give cause for concern rather than jubilation. While companies with lots of workers have naturally seen their profits – and share prices – suffer during lockdown, the long-term health of the global economy will likely require firms to support both a sustainable environment and sustainable employment...

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