People putting their money into environmental, social and governance (ESG) investments might be in for disappointment, Greenchip Financial's John Cook said.
ESG funds, which select companies for their broader environmental and social impact on top of performance, include a lot of big names whose business has little to do with reducing pollution, Greenchip president Cook said.
Traditional investments like Amazon.com Inc., Facebook Inc. and JP Morgan are often at the top of portfolios labelled ESG.
“When I talk to young people who are interested in the sustainable economy, I don't think they're thinking, 'I want Netflix to behave better,'” Cook said in an interview July 9 with Corporate Knights. “I think they're thinking, 'Solar panels and wind turbines and (electric vehicles) and more efficient ways to reduce energy and reduce pollution.'
Cook, whose investment fund focuses on companies selling the “stuff” of the low-carbon or sustainable economy, said the difference between what ESG means and how some investors might perceive it has been growing with the expansion of ESG funds globally.
The current assets under management of socially-responsible investing and ESG funds grew by 25 per cent between 2014 and 2016 to reach around US$23-trillion, Morgan Stanley's May report on the market, ESG Investing Goes Mainstream, says.
Almost 40 per cent of asset allocators use some kind of ESG measure in their investment decisions compared to just 20 per cent three years ago, the report says.
Investment funds in this space are led by equities that would appear to do well regardless of their impact on the environmental and society, Cook said in a note to Greenchip investors on July 9 on ESG indicators.
While there are over 400 U.S. stocks in a new offering from Goldman Sachs called the JUST fund, the top five positions are held by Amazon, Apple, Microsoft, Facebook and JP Morgan, Cook's note says.
Whether this means ESG is making a difference for the environment and society is a tough question.
Morgan Stanley's report from May says that ESG is having an impact. Overall, the amount of ESG disclosure is growing and ESG indicators are rising over time, it says. Interestingly, ESG indicators have risen in emerging economies in the 2010-2015 period, but declined in developed markets over the same time, the report says.
Cook is not so certain the approach is pushing markets toward a sustainable model.
“We need to keep investing in all this stuff -- the traditional economy -- but we also want to have a foot on the dock of the new economy,” he said.
For those who agree with Cook, the key is to differentiate between what companies sell and how companies behave, he said.
The ESG market rewards sound environmental and social behaviour. Amazon's main businesses don't involve a lot of air pollution, for example, compared to the rest of the economy, so its strong economic and ESG performance make it a good investment.
But other funds, like Greenchip's, focus more on what a companies does. Do they replace competitors that pollute more? Are they building products that turn economies away from intensive resource use?
Some of the companies Greenchip invests in include Canadian Solar, rail company Alstom and LED-maker Signify, formerly Philips Lighting.
Cook advises to not just use the ESG tag but look for “sustainability themed” funds.
“They need to look past the label,” he said.
