- Environmental, social, and governance (ESG) is growing trend among investors.
- Investors want exposure to ESG companies but are fund managers really listening?
- There is no standard definition what constitutes ESG.
Actively managed sustainable equity funds appear to be conversing with some of the world’s largest and most visible tech companies, according to The Wall Street Journal.
ESG Equals FAANG
ESG, an acronym for environmental, social, and governance ranks among some of the more pressing investor concerns. Green policies like renewable energy offer economic benefits to companies and investors want to use their influence to increase awareness. As investor demand for exposure to leading ESG grows, so does actively managed sustainable equity funds.
But coming as a surprise to many investors, some of the biggest names in ESG portfolios are members of the FAANG group. RBC Capital Markets found that Alphabet and Apple are among the five most commonly held S&P 500 stocks in these funds. Names just outside of the top five include Amazon and Facebook. The sole FAANG company missing from the list is streaming video giant, Netflix.
But Does ESG Really Equal FAANG?
There is no standard definition of what constitutes ESG practices. All of Apple’s data centers are powered fully by renewable energy and the company deserves credit lowering its total greenhouse gas emissions over the years. But at the same time, Apple’s carbon footprint was estimated at 25.2 million metric tons per year.
The rating agencies and index providers are now grading companies on their ESG performance. Tech giant Microsoft is among the elite companies who scored an “AAA” rating. Index provider MSCI cited Microsoft’s strong stance on privacy and data security, corporate governance, absence of any visible corruption, the stability of management, and a commitment towards clean technology innovation.
So does Apple rightfully belong in a group of companies known for ESG practices? The short answer is most likely yes, by default of it not being an oil and gas company. Mitch Goldberg, president of ClientFirst Strategy told WSJ ESG funds are “often invested in stocks that don’t tell the picture of what might think ESG does.”
ESG Funds Have Failed
Looking at an ESG fund with heavy exposure to tech giants makes one wonder what is the point of an innovative investment tool in the first place. Todd Rosenbluth, head of ETF and mutual-fund research at CFRA, told WSJ it’s unclear “what’s the extra benefit” of an ESG fund that looks no different than one of the many tech funds already in existence.
This also begs the question if the industry has failed to live up to its purpose. Even the U.S. Securities and Exchange Commission is getting involved by asking advisors how and what exactly constitutes a sustainable company.