Week 30: Ready to invest in an ESG fund, are you?

In this issue: ▸ Enough is enough ▸ Have we lost the fight already? ▸ Before investing in an ESG fund, ask these questions ▸ U.S. and the problem with ESG funds ▸ And much more...

Dear all, 

This week we continue into the complexities of the reality we live in, a machinery we all take part in and are connected to.

Last week’s country journeys to Norway and Saudi Arabia exemplified the deep complexities of the transition to a more sustainable future.

Enough is enough

Answering the “why” question of the transition is very important, but when you hear the latest screams from Mother Earth (floods, droughts, storms, fires, abnormal temperatures etc.), it becomes clear that we are moving more into crisis management than ever before.

One example: Greenland’s vast ice sheet is undergoing a surge in melting, with the amount of ice vanishing in a single day this week enough to cover the whole of Florida in two inches of water, researchers have found.

The deluge of melting has reached deep into Greenland’s enormous icy interior, with data from the Danish government showing that the ice sheet lost 8.5bn tons of surface mass on Tuesday alone. A further 8.4bn tons was lost on Thursday, the Polar Portal monitoring website reported.

Mother Earth is screaming “ENOUGH!!” to a civilisation that in a very short period of time has created challenges for centuries to come.  

We don’t know if the Danish government has a constructive dialogue with the Norwegian government about oil extraction. They probably don’t, but I sincerely hope they will have that dialogue pronto.  

Have we lost the fight already?

Are we on a mission? To where? To save this planet? To save ourselves? Or to save “our way of life” (the machinery I mentioned before)?

Do we have a sense of purpose? Do we know where we want to go from here? Does this interconnected complexity of the machinery we all take part in give us any viable alternatives?  

The media coverage and the narratives from some scientists are changing very rapidly.

The feeling you get is that we have departed from addressing causes of the situation we are in towards accepting the fact that we have lost the fight. We are retreating into a mode of managing the reminisces of our realities.

We aren’t programmed to try to change the weather. Humans experience the euphemistic “climate change” disaster that is playing out before our eyes as, mostly, weather. You can’t change hurricanes, typhoons, or volcanoes. All you can do is flee. Which is what we’ve always done. We left. And those who can do that now, are doing it.

In geologic time, the environmental collapse will happen in an instant. In human time, it’s playing out in slow motion.

Democracy doesn’t work quickly. In wartime, it took years to mobilize. We don’t have years, and we don’t have a clear enemy. Or is that just our way of expressing that we don’t want to fight ourselves?

Anyway, the notion that we can be on both sides of history – the unsustainable and the more sustainable one – without really taking a stand is mirage. 

This is interesting piece. A bit heavy, but you should read it. It tells you why it’s so damn hard.

Before investing in an ESG fund, ask these questions

We move on to ESG and some of the latest developments in that space. 

It is a great year for ESG investments after all. Assets are just exploding. Global sustainable fund assets hit a record $2.3 tln in Q2 for their fifth consecutive quarter of growth, up 12% from the end of March. 

However, since we know that a lot of this is hot air, and in order to see through the mist of ESG greenwashing, you should ask the following questions when you look at an ESG fund:

• Is it a fund or an asset management firm that is a new entrant or an established ESG/sustainable investing provider since years back?

• Is the fund ESG-purpose built, or is it a repurposed conventional fund? (The latter is very common, i.e. new packaging… putting lipstick on a pig 🐷💋)

• What is the level of ESG integration within the investment process? What are the sources of ESG data? Is it passive or active integration? If they don’t know the difference, just forget about it. 

• What is the size and experience of the ESG team? This makes a huge difference. 

• What is the ESG product’s sophistication? (e.g. exclusion, ESG integration, impact, outcome). Does ESG come in the beginning, in the middle or at the end?

• What is the firm’s ESG engagement capability and engagement history? Sending letters is nice, visiting companies on the ground, where their business is, is king. 

• Does it feature transparent engagement and proxy reporting? Can you understand what they do and why? Can you see any outcomes? 

• Do they provide ESG/sustainable investing research and thought leadership? If no own research, well, then it’s hard to see the point…

• How aligned to the ESG objective are the stocks, bonds and other financial instruments held in the portfolio? You can’t do stocks and ignore bonds – it doesn’t make sense.

U.S. and the problem with ESG funds

Now onto a quick look at the U.S. and the ESG challenges there.

We begin with the ten largest U.S. public pension funds. As it turns out, they still have a lot of money invested in the biggest corporate polluters. Analysts at Bloomberg Intelligence have put the figure at about $40 billion, meaning 9% of the funds’ combined equity holdings are devoted to 20 high-carbon emitting companies.

The numbers may be lower since California and New York funds pared their stakes in companies including Exxon Mobil Corp., Walmart Inc. and Southern Co. since the start of the year.

On that note, if you want to find out what the top 10 ESG stocks on the S&P are, you can find it here. There are some very interesting names on that list, I would say. How do you like Home Depot, for example? Doesn’t sound very sustainable.

But still much better than aerospace and defence stocks, of course. Usually, ESG funds avoid these entirely. But that might change soon. Read more here.

What it all comes down to is the importance of measuring ESG performance. Most ESG funds and investors are lagging behind in this regard. How should they go about it? You can read about it here.

The short answer is that ESG fund managers should abandon traditional benchmarks like the S&P 500 in favor of ESG indexes.

Climate-conscious banks stick with distressed polluters

Still in the U.S., we move on to a rather interesting case.

ESG can be difficult to clearly define and “we need to be realistic about fossil fuel and even coal usage for applications where there is no substitute,” Barry Kupferberg told WSJ this week. Kupferberg is managing partner of Barkers Point Capital Advisors, an investment banking and advisory firm focused on energy transition companies. “This inevitably leads to decisions and positions that can appear inconsistent with stated goals,” he added.

An honest and very clear analysis. The background for the story was the news that Goldman Sachs Group Inc. and JPMorgan Chase & Co. – who both have lofty environmental goals – find themselves stuck in bets on two less-than-green energy companies.

So, essentially, the banks are confronting the need to protect investments in troubled energy companies while also living up to commitments to sustainability in their ESG policies.

Goldman Sachs is poised along with other investors to take control of bankrupt driller Nine Point Energy Holdings Inc., which has been flaring natural gas in North Dakota at rates that exceed stated guidelines.

And JPMorgan Chase is financing the nation’s largest coal producer, Peabody Energy Corp., and extended it a lifeline that lasts through the end of 2024, a year after its self-imposed deadline for phasing out its credit exposure to the coal industry.

A good example of the dilemmas that banks and other corporates are facing these years.

ESG risks not incorporated properly

Now a short visit to the UK.

Most fiduciary managers do not incorporate ESG risks into investments properly, despite trustees’ support for ESG’s usage in making investment decisions, research suggests.

Nearly 68% of fiduciary managers have no explicit climate-related requirement for the third-party asset managers they appoint, while 42% do not exclude underlying managers with poor ESG ratings.

According to a survey of over 200 pension schemes and trustees, 94% of trustees agree that ESG risks should be considered in investment decision making.

So still just lip service. 

Where are we heading?

So where are we going now? What is next? And next after that?

There are many different scenarios and stories, and it was very disappointing to read that the G20 ministers failed to reach a tangible agreement on phasing out coal.

We still don’t know where these people want us to go.

Maybe we’re heading for something like what Paul Kingsnorth describes in this piece, written from a distant future. This part seems to me to be right on the money:

To the Faustian West, “saving the world” had been just another means of trying to control it, but Gaia, like God, would not be not mocked. Life went on, but civilisation, increasingly, didn’t. Cities fell, waters rose, deserts spread. Jeff, Mark, Richard and Elon went into low Earth orbit on separate rockets, all claiming to have got there first, but their head-freezing facility in the Sonoran desert suffered a tragic thawing episode when the solar farm formerly known as Kansas was knocked out by a freak solar flare.

By the late 21st century the oil wells were slowly bottoming out, the rare earth metals were exhausted, and the boundless renewable future of electric cars and limitless green energy had been filed away and forgotten like an embarrassing teenage crush. The asteroid mines never got off the drawing board. The population peaked and started falling, along with the sperm counts. The suburbs and the oceans slowly emptied, and the stuttering Internet became so poisonous that even Mumsnet came with a trigger warning. Everyone told themselves that progress would be happening properly if only those people weren’t in charge.

Fossil fuel companies to sue governments for passing laws to protect environment…

Some time ago, I addressed the topic of the Energy Charter Treaty (ECT). A treaty which means that energy companies can sue any of the 53 signatory countries if they take action that could dent those companies’ future earnings, such as banning the exploitation of coal, oil and gas reserves.

This has now become very real as Italy could be forced to pay millions of pounds in damages to a UK oil company after banning new drilling near its coast.

The case has sparked outrage amid fears that such cases are slowing down action on the climate crisis. It is also fuelling concern that the UK is particularly exposed to the risk of oil firms suing to prevent green policies, potentially hampering climate action. 

“Our Future Planet” – brought to you by Shell!

We end this week with a rather tragicomical piece.

Shell is sponsoring London’s Science Museum’s Our Future Planet exhibition, which explores technologies to remove carbon dioxide from the atmosphere.

Now the question is: What kind of pill, red or blue, will we take next week?

Best regards,
Sasja