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Beware the ESG Wolves in Sheep’s Clothing In 2022

ESG Wolves

With COP26 still fresh in the memory, more people than ever are predicted to pile into ESG (Environmental, Social and Corporate Governance) funds this ISA season, but it’s important investors look under the bonnet before they buy.

Many of these funds are not as ‘responsible’ — and certainly not as environmentally friendly — as they seem. In fact, it’s fair to say quite a few are little more than ESG wolves in sheep’s clothing.

It will come as no surprise that the fund management industry has created an unbelievable amount of smoke and mirrors around ESG investment, so much so that some of the ESG funds out there hold the ultimate sin stocks in their portfolios.

In many cases, stocks that are the antithesis of ESG are not even hidden but appear in the top 10 holdings of funds that promote themselves as ‘investment for good’. You couldn’t make it up.

Terms like ‘ESG screening’ and ‘ESG Aware’ are a particular red flag and whenever they crop up, I’m urging investors to proceed with extreme caution. Being ‘aware of ESG’ and actually acting upon it are two entirely different things.

If you’re going to start anywhere, we recommend you search for “Impact” funds, as these tend to be more credible, and then work down from there.

Dig a little deeper and you’ll find that “ESG Screened” funds only tend to screen out things like alcohol, pornography, weapons and gambling, and turn a blind eye to issues such as deforestation, oil, human rights and plastic pollution.

With all this in mind, we’ve singled out five of the biggest ESG tricksters, which promote themselves as being a force for good, and yet which are the polar opposite of everything ESG aspires to represent. They are listed below.

1. ESG Aware MSCI USA ETF

Why avoid? Top 10 holding JPMorgan Chase is the largest fossil fuel financer in the world, pumping more than $36 billion into oil since the Paris Agreement. Any fund can be ‘ESG Aware’, but the important bit is to act on it.

2. Core MSCI Europe ETF

Why avoid? How long have you got? Holdings include British American Tobacco, BP, Shell, Glencore, Rio Tinto and Airbus. Exactly how is this ESG? If anything, this should be categorised as a vice fund.

3. ESG Screened S&P 500 ETF

Why avoid? This fund’s portfolio reminds us of a tacky kid’s party, containing Costco, Target, Pepsi and McDonald’s. Oh, and there’s Starbucks for the adults. Less ‘ESG screened’ than ‘ESG smoke and mirrors’.

4. MSCI Eurozone ETF

Why avoid? Where do we start? Coca Cola, Adidas, Volkswagen, BMW, Ferrari, Renault, Michelin and Porsche. Like, how could any of these environmental hooligans be considered ESG? Plain bizarre.

5. iShares Europe ETF

Why avoid? This fund is sin stock central, holding some of the most carbon-intensive companies in the world, from Total Energy, BP and Shell to BNP Paribas (worst fossil fuel bank in Europe), Rio Tinto and Glencore. Go figure, because we can’t.

Ultimately, if you’re out to build a responsible retirement pot built on genuine ESG foundations, do your homework before you invest.

Ignore the eco-friendly marketing that fund managers increasingly throw our way, and look at what they’re holding in their funds in the cold light of day.

Collectively, the money we all invest in pensions and ISAs is hugely powerful — and the way we choose to invest it can, quite literally, make a world of difference.

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