ESG funds have attracted about $340billion over the past two years – almost twice as much as the rest of the stock universe combined. This has done two things – it has pushed allegedly ‘friendly’ investments (on very dubious and partisan criteria) to frightening peaks where a crash is inevitable to many extents, but it has also hit ‘sin stocks’ which have seen their universe of culprits increase as Society’s latest trends for exclusion widen further. The FT says ‘investors lulled by optimistic back tests and wishful thinking, assuming they can do well from doing good, could end-up being disappointed’.
Curiously, back testing the sin stocks shows that investors would have done remarkably well over time by holding these. I am not suggesting ‘it’ (or not – and we are talking about totally legal and legitimate business pursuits, most of which we all support in one way or another even if not realising it) but we could be on the cusp of a similar period of out-performance by these entities, at the same time the over-bought ‘friendlies’ come unstuck. There is an economic model too that says they must charge higher prices for their goods, as they have bigger barriers to their legitimate trades and thus, they will reap more profit to counter the extra risk and costs of accessing the scarcer capital they need. The article suggests that for many of these ESG investors they may learn that ‘virtue will have to be its own reward’, that profits are not generated and indeed that the risks are very high when you buy at the peak of a trendy time like ‘now’.
It is an interesting one though. Would you like to invest in company ‘a’ which creates life and planet-saving technology, or ‘b’ producing, say, paint? The heart would say the ‘first’ please but what if that is 10,000 times too expensive and the second, the paint company, is making so much money it is struggling to distribute it or reinvest it quickly enough to shareholders and is priced at a give-away level? Sorry, but whilst it might sound and feel ‘fluffily nice’ to buy option ‘a’, you need to buy option ‘b’ and then make GiftAid donations from your vast profits to your favourite charities for your core interests. Do you understand the difference? We believe we do – we must keep irrational behaviour at bay for our clients!