Ethical stocks have tumbled – but they are still a good bet

Choosing ESG – environmental, social and governance – investments should be good for the soul, the planet and the wallet.

Recently, however, this has not been the case.

Approximately $4 trillion is invested in ESG funds worldwide. But the achievements weren’t exactly life-enhancing, as most don’t own the defense, mining and oil companies that thrived amid Ukraine’s energy crisis and war.

The MSCI World SRI index of socially responsible stocks plunged 22 percent last year, a drop deeper than that of the broad MSCI World Index.

This creates a tricky dilemma for investors who want to see growth, but also value ethics and the recovery of the ecosystem.

In addition to dissatisfaction with performance, there is also concern about fund managers allegedly engaging in ‘greenwashing’, ie misusing the ESG label to attract clients. in the US there are arguments over whether companies and fund managers are guided by progressive values ​​in financial decisions.

Here, Terry Smith of Fundsmith berated Unilever for being too preoccupied with “awakened” concerns.

So should investors avoid sustainability? Or should they bide their time expecting ESG to pay off in the long run?

As an investor in a range of ESG funds, with a focus on energy storage and renewable energy sources, I am excited about the benefits that can accrue from “green technology”, which aims to reduce energy use in homes, commercial buildings and transportation. Fathom Consulting calculates that as much as $100 trillion will be spent worldwide on this type of innovation over the next two decades. But I’m also bracing for further setbacks, which Mike Fox, head of sustainable investment at Royal London Asset Management says are inevitable.

He says: “Investors are underestimating some of the short-term headwinds facing sustainable funds.”

Among the headwinds are those “greenwashing” levies. Shortly before the war in Ukraine, about $8.3 billion in so-called ESG funds were invested in Russian assets. Fortunately, Chancellor Jeremy Hunt is trying to crack down on the greenwashing deception. As part of its post-Brexit City reforms, ESG rating providers will be brought under the scrutiny of the City’s watchdog, the Financial Conduct Authority.

Research shows that many investors believe funds should work with companies to drive reform. But they would also like much more openness about funds’ strategies, such as ’tilting’.

Part of your money is invested in companies with clearly non-green characteristics in order to increase returns.

Terry Smith, of Fundsmith

A best-in-class strategy focuses on companies that focus more of their efforts on ESG compared to others in their industry, such as BP and Shell, both of which have their hydrogen, solar, wind and and other renewable energy rapidly expanding.

However, Big Oil will always be anathema to some, suggesting you check that your positions are in line with your personal principles.

Some global ESG funds own US tech stocks, which will raise some eyebrows, although some, like me, take a pragmatic view.

For example, the largest participation in CT Responsible global Equity is Apple. Perhaps not the most obvious candidate for an ESG fund given its goal of convincing people to buy and upgrade electronic gadgets. I want to diversify into Ct Responsible Global Equity and other funds recommended by FundCaliber, including Ninety One Global Environment and Liontrust Sustainable Future Growth.

Liontrust’s Peter Michaelis says it recently acquired a stake in US quality control and testing group Agilent Technologies, which ensures that “the food we eat, the air we breathe and the water we drink are free from harmful chemicals and contaminants ‘.

If you’re building an ESG portion of your portfolio and want similar inspirational companies, Max Richardson of Investec Wealth recommends Nvidia, the US semiconductor group.

He also suggests Schneider Electric, whose systems aim to reduce greenhouse gas emissions from buildings. Schneider, a French company, is best known to British investors for its recent bid to acquire software developer Aveva. Some leading shareholders resented the deal and Schneider’s ties to China. Nothing is easy in ESG investing.