Are green ‘ESG’ funds really investment superheroes?

New rules to ensure that investors don’t buy a green investment fund that is anything but eco-friendly are nothing but a joke.

That is the deliberate – and somewhat controversial – view of some leading investment experts who have long believed that the mutual fund management industry (in the UK and US) has hijacked the green agenda for its own sake.

That is, to generate premiums from the sale of funds that the public knows will buy almost blindly because they are classified as “green”, “socially responsible”, “ESG friendly”, “sustainable”, “ethical” or ” impact’ are labeled. to invest’. The term ESG stands for environmental, social and governance investing.

Often, but not always, these badged funds – “superhero funds” in the eyes of many investors – are packed with stocks such as global mining giants, gambling companies, oil and gas producers and tobacco companies that most green investors would otherwise run a mile from. . Mislabeling such investments is often referred to as “greenwashing.” A more appropriate word is ‘deceit’.

Tariq Fancy, the former global chief investment officer for sustainable investing at mega asset manager BlackRock, believes the green investment industry is underpinned by deception. Last year, he said the industry “sold the public a wheatgrass placebo as a cure for cancer.”

Skeptics argue that the changes proposed by the city regulator (the Financial Conduct Authority) will give the country’s fund management industry an even greater license to manage green funds (or sustainable funds as it calls them) that contain investments many investors don’t. for recoil.

Under the rules, fund managers can claim that a fund is ‘sustainable’ (environmentally and/or socially sustainable) even if up to 30 percent of its assets are in non-sustainable assets, such as companies that produce plastic bottles.

“The rules are an absolute mess,” said Alan Miller, co-founder of asset manager SCM Direct and one of the country’s most respected asset managers.

Over the past few years, Miller has led the way (mainly through the pages of The Mail on Sunday) in highlighting the widespread mis-selling and mis-marketing of green funds.

Miller says that until there is a review of the way independent rating agencies rate companies on ESG issues, mutual funds will continue to hold stocks that most people would think are not part of a green-oriented fund.

The ESG scores that agencies apply to companies are an important determinant in deciding which stocks a green fund will hold.

“How crazy is it,” Miller says, “that a tobacco company like BAT is the third-highest ESG-listed company in the FTSE100 Index?”

He analyzed the top ten ‘sin’ stocks in the FTSE100 Index that are active in the oil and gas, alcohol, tobacco, mining, defense and gambling sectors.

These stocks — Shell, Diageo, BP, Rio Tinto, BAT, Glencore, Anglo American, BAE Systems, Imperial Brands and Flutter Entertainment — have a higher average ESG score than the FTSE100 as a whole, according to a leading ESG data provider, Refinitive . ESG ratings reform will not feature in the new FCA rules, although the regulator says investment firms must ensure that the data they rely on to make sustainable investment decisions is fit for purpose. Miller thinks this will prove to be ‘impossible to realize’. =

Across the Atlantic, hedge fund manager Carson Block of Muddy Waters Capital—a green fund skeptic like Miller—believes that many investors are being misled. More regulations, he says, will not change much. Last week, he told MoS, “In my career as an investment analyst and investment manager, I would say that the more rules a regulator puts in place, the more regulated people try to find ways to get around them — and succeed.”

He also said that because ESG-friendly companies and mutual funds claim they are doing their part to save the world from ecological destruction, it “is considered impolite to ask them difficult questions.” As a result, they are often able to escape scrutiny that would reveal any wrongdoing. Block believes that the only way investors can stay true to their own views on green issues is to avoid investment funds altogether and do their own stock selection — albeit with a large dose of skepticism.

“The louder a company yells about its ESG credentials,” he says, “the more skeptical you have to be as an investor.”

Miller says a simple but highly effective solution would be for all green investment funds to disclose all of their holdings so prospective investors can decide if they’re comfortable with it. The proposed FCA rules for labeling green investment funds come at a time when interest in such investments is steadily increasing.

The regulator’s own research shows that more than four-fifths of all adults would like their investments to “do some good” and bring them some profit, too.

According to data from the Investment Association, more than £86 billion has been invested in responsible investment funds, representing 6.5 percent of all assets managed by the fund management industry. In 2020, the equivalent percentage was 3.9 percent.

In a 179-page document that Alan Miller says is “baffling even to professionals,” the FCA proposes three new labels under which green funds can fall: sustainable “focus,” “improvers” and “impact.”

A fund can categorize itself as sustainably oriented if at least 70 percent of its underlying investments meet ‘a credible standard of environmental and/or social sustainability’.

Improvers are funds that encourage companies to improve their sustainability credentials over time. The third are funds that invest in companies that do things to improve the environment.

The FCA plans to publish the final rules for green funds next summer, though they are unlikely to take effect until a year later.

Research published a few days ago by the Association of Investment Companies indicates that only one percent of financial advisors and asset managers “completely trust” the sustainability claims of green fund managers.

Sacha Sadan, FCA’s director of environment, society and governance, believes the rules will help “build trust” in green investment funds. Others disagree, however, with Alan Miller arguing that the new rules will only push fund groups into even more regulation and compliance, passing the costs on to investors.

As Carson Block told the MoS last week, most green investment funds are “not a deliberate marketing scam, but a scam nonetheless.” Buyer beware.