JEFF PRESTRIDGE: The ESG investing industry is a mess
JEFF PRESTRIDGE: The booming environmental, social and governance investment industry is currently in a mess: sinless? Pull the other…
At some point this fall, the country’s financial regulator will release its proposals on protecting green investors from “green laundering” – investment firms making claims that are exaggerated, misleading or not based on ESG (environmental, social and governance) of their products.
When exactly, I’m not sure – the regulator’s fall is sometimes our winter or our spring. But these are recommendations that can’t come soon enough because the burgeoning ESG investing industry is currently a mess, awash with funds that are simply not ESG-friendly.
Indeed, if investors were to look under the hood of some of these green funds and examine their portfolios, they would be shocked and would likely demand that the manager be handcuffed to the nearest railings and pelted with raw eggs or smeared with green paint.
Not fit for purpose: Due to ineffective regulatory oversight by the FCA, investors are driven every day to buy funds they think are green
The values of tobacco in an ESG fund? Beverage company stocks? Game actions? Oil and gas companies? Yes, ladies and gentlemen, some funds marketed on the basis of their ESG friendliness are full of such stocks of sin.
Due to ineffective regulatory oversight by the Financial Conduct Authority (a phrase I’ve used many times over the years), investors are tricked into buying funds every day that they think are green, but are anything but that. It’s like the Wild West. To date, no investment firm has been publicly fined or sanctioned for the greenwashing that the FCA wants to eradicate. A joke.
Fund manager Alan Miller, co-founder of investment house SCM Direct, is a longtime critic of how investment funds have played loose and loose with ESG labels. It refers to the “world of Alice in Wonderland” of ESG funds. Miller thinks the flaws run deep – starting with how companies are rated ESG by ratings agencies (like Morningstar and MSCI) to the rules governing how a fund can be classified as ESG.
At the corporate level, a tobacco company can earn a good ESG score because it is better than its peers.
And this despite the fact that the World Health Organization claims that every year the tobacco industry “costs the world more than eight million lives, 600 million trees, 200,000 hectares of land, 22 billion tons of water and 84 million tonnes of CO2”.
Moreover, since ESG ratings give equal weight to environmental friendliness, social responsibility and corporate governance, a company may continue to destroy the environment, but score high due to its commitment to the “S” and “G” of ESG.
All of this explains why companies such as tobacco stock FTSE100 BAT, mining giant Glencore and oil and gas companies BP and Shell all get overall ESG ratings from Refinitiv agency above 90 out of 100.
This is also the reason why many ESG investment funds include these companies in their portfolios. I’m not sure I would be happy with it if I was a green investor.
As for investment funds, the rules with which they must currently comply are just as flexible. The main classification system allows a fund to be ESG as long as it promotes stocks with good governance – they don’t have to possess good environmental characteristics.
Last week, Miller analyzed the portfolios of 224 ESG investment funds and exchange-traded funds that are promoted to investors in the UK. To his horror, he discovered that 11 of them had more than 10% of their portfolios invested in sectors that you think would not be close to an ESG portfolio – alcohol, tobacco, gambling, oil and gas.
The worst offender is Royal London UK Core Equity Tilt – a £6.6bn fund investing in some of the UK’s biggest companies that are good at ESG. More than a quarter of its portfolio is made up of liquor, tobacco, gambling, and oil and gas stocks.
On Friday, Royal London said the fund did not rule out investing in any sector, but had less exposure to sin stocks than the index.
It’s OK then (written with sarcasm).
As for the FCA, it told me on Friday that greenwashing “undermines trust” in ESG products — and that its proposals on ESG fund labeling “would help ensure consumers understand where their money is being invested.”
I hope so, although I – and Alan Miller – fear another regulatory laundering.