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Advisers warned of ESG 'bubble'

Advisers warned of ESG 'bubble'

Investments that conform to ethical, sustainable and governance (ESG) rules are expected to play a major role in client portfolios in the future, but right now the sector is in the grip of a bubble, a Schroders fund manager has warned

Speaking at a dinner at the firm’s offices in London last night (January 3), James Sym, European equity fund manager at Schroders, said current valuations did not reflect the actual value of ESG assets.

He said: “It is definitely the case that clients want asset managers to do more with their money than just invest it for a return, and that will continue.

"There is no doubt that in future we will use fewer fossil fuels than we do now. But the issue at the moment is with the valuations of many of the companies in the ESG space.

"The valuations have gone beyond the reality of where the world is right now.

"I would cite the example of Solar. A company we know of in Spain is able to build solar plants with borrowed money for basically zero interest, in fact, they are borrowing more than the full cost of building them, and that is a classic characteristic of a bubble. I think clients should be aware of this.” 

Morningstar data covering the first ten months of 2019 showed investors were placing £124m a week into ESG funds at that time. 

Mr Sym’s view was endorsed by Alan Steel, of Alan Steel Asset Management in Linlithgow, who said: “Over the 47 years I’ve been an IFA when the investing public increase their demand of one kind of investment theme over another, it’s time for a sharp exit. I think tech in 1998/9, property in 2006, gold in 2012/3, Gars in 2014. Best of luck to them.” 

Paul Gibson, an adviser at Granite Financial Planning in Aberdeen, said: “In the four years we have been trading I can count on one hand the number of enquiries we have had in this area.

"Whilst I do think ESG investing will increase in demand I can’t help but feel that interest is being fuelled by fund manager groups looking to 'sell' their expertise in this area." 

Fundhouse Baillie Gifford has previously expressed concern that providers in the market are "greenwashing", that is, attaching certain words or phrases to the name of their product in order to create the appearance of being ESG compliant.

The Edinburgh-based fund house expressed fears that such practices could damage demand for genuine ESG funds in future.  

david.thorpe@ft.com

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