Sustainable Investing  

ESG and the future of investing

This article is part of
Guide to sustainable investing

ESG and the future of investing
Denis Charlet/AFP via Getty Images

Interest in environmental, social and governance-related funds sky-rocketed this year, with total investment topping $1trn (£778bn) for the first time on record, according to data from Morningstar. 

One of the biggest concerns about ESG is that it excludes parts of the investment universe, hurting returns.

The good news is that funds which market themselves on their ESG credentials do not just focus on companies fighting global warming, with many of them incorporating technology stocks.

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But if you are expecting ESG funds to be investing in small and innovative renewable energy companies, you might want to think again.

According to Morningstar, eight of the 10 best-performing large-cap US funds that incorporated ESG principles had Apple, Amazon or Microsoft as their biggest holding in the year ending July 27.

Separate data from Refinitiv also shows that out of the top 10 performing funds that it labelled ESG in the year to June 30, 19 per cent of assets were in Faang stocks – Facebook, Amazon, Apple, Netflix and Google – or Microsoft.

  • ESG stocks can include tech stocks.
  • ESG stocks have to be sustainable.
  • Greenwashing has become more prevalent.

Technology companies tend not to have a reputation as carbon emitters and therefore seem like a safe bet if your clients’ investment goal is focused on climate.

They have also been some of the best-performing investments over the past decade, in some cases quadrupling returns for investors. So it is easy to understand why so many fund managers are keen to have them in their ESG portfolios.

Exposure to trends

Technology companies are increasingly providing solutions to many of the problems the world faces, such as water scarcity, pollution management and climate change.

Advisers who adopt an ESG strategy incorporating tech stocks can give their clients exposure to the industries and trends of the future.

Technology companies also potentially benefit from having more transparent ESG reporting policies, another contributing factor to their dominance in more mainstream strategies.

Harry Waight, portfolio manager, global equities at BMO Global Asset Management, says an effective ESG strategy needs to embrace companies aligned with the sustainable trends of the future.

He says: “There are many such trends to capitalise on, from sustainable mobility to technological innovation, to good health and wellbeing. One major trend is the epochal energy transition underway, as we move to a materially less carbon-intensive economy.

“This trend towards sustainable fuel sources will be a vital part of the global economy for decades, and a prudent sustainable strategy will seek to align with that.”

However, it is wrong to assume that tech stocks are automatically ESG-friendly.

For example, Facebook has had to deal with the fallout from the Cambridge Analytica scandal and concerns over data privacy, causing some ESG funds to rethink their interest in the company.

Meanwhile, Amazon has been slated for its working practices and Google has been investigated over its monopoly status.