Lobby group Net Zero Watch has warned that environmental, societal, and governance (ESG) is unlikely to survive in its current form.
They told Money Marketing that ESG has become an investment risk as a result of the energy crisis.
A spokesperson for Net Zero Watch said: “Most fund managers who have been betting on the ESG agenda are losing billions of their clients’ investment as a result of the deepening energy crisis while those who are energy realists will make billions.
“The green and ESG agenda has become a huge investment risk and is unlikely to survive in its current form.”
Analyst and former fund manager Peter Cameron shares similar views.
He told Money Marketing: “A number of utility companies are planning to reopen coal plants to help lessen the reliance on Russian gas.
“Many investors have made net-zero pledges and committed to no longer funding coal, but that was before Russia invaded Ukraine.
“The situation has now changed, and I think fund managers will have to temporarily suspend their ESG/climate pledges in order to tackle the more pressing threat that is Russian aggression.”
Energy secretary Kwasi Kwarteng recently requested Drax power station in North Yorkshire to delay the closure of its coal-fired generators.
The coal plants were scheduled to shut in September but will remain available “if needed” until the end of March.
Fears over the security of Russian gas supplies have led Kwarteng to take this decision he called a “sensible precaution”.
The two houses of parliament in Germany have also voted an emergency legislation to reactivate coal-fired power plants for similar reasons.
Cameron added: “There has been a big debate within the ESG community over whether defence companies should now be investable.
“For decades, they were considered no-go areas for ESG funds, but some people are now making the case that defence is important for preserving democracy and human rights and should therefore be included in ESG.
Has Russia’s invasion of Ukraine made defence stocks ESG friendly?
“With regards to climate, the debate involves weighing conflicting issues against each other.
“On the one hand, there is an urgency to reduce our emissions and prevent runaway climate change.
“On the other hand, the ongoing use of Russian gas is providing Moscow with billions each month to bolster its war efforts.
“At present, I don’t think the ESG community is particularly willing to engage in this debate.
“So much of ESG is about image rather than impact, so the easiest thing to do is to simply stick to their climate commitments.
“But if doing so means we remain reliant on Russian gas then it’s arguably an abdication of responsibility by the self-styled ‘responsible investment’ industry.”
The MSCI world ESG focus index has seen a -16.27 % decline over the past three months. It is roughly in line with the MSCI world index, which fell by -16.19% over the same period.
Index performance – Net returns as of 30 June 2022
| 1 month | 3 month | 1 year | Year to date | 3 years | 5 years | 10 years | |
| MSCI world ESG focus | -8.54% | -16.27% | -14.96% | -21.02% | 7.37% | 8.00% | 9.69% |
| MSCI world index | -8.66% | -16.19% | -14.34% | -20.51% | 7.00% | 7.67 | 9.51% |
Source: MSCI
UK large-cap equity funds with the highest ESG ratings have underperformed funds with the lowest ESG ratings.
The former are down 13% in the past year compared to just 4% for the latter category, according to new research by Bowmore Asset Management.
This is due to a lack of exposure to firms which have benefited from high inflation, the asset manager explained. That includes among others commodity firms.
Bowmore chief investment officer Jonathan Webster-Smith said: “While it is tempting to question ESG funds due to their recent poor performance, investors need to be patient.
“Over longer time horizons, earnings matter and ESG funds should deliver better returns than funds which don’t consider ESG due to the growth opportunity.
“The weight of money that has moved and we suspect will move over the next few years ESG funds should allow create a premium on ESG focused companies.
“The investment that we expect to see within clean energy is going to be significant, but any ESG focused businesses should also do better through stronger employee, customer and supplier relations.”
Top 10 ESG funds – Estimated fund-level net flow (in Euros) since the beginning of the year
| Name | January 2022 | February 2022 | March 2022 | April 2022 | May 2022 | June 2022 | ||
| Pictet-Global Megatrend Sel I USD | -77,985,004 | -36,075,014 | -81,598,405 | -13,971,278 | -3,524,414 | -54,722,615 | ||
| ACS Climate Transition World Equity T0 | 2,594,103,630 | 1,375,297,183 | -24,508,043 | -17,036,413 | -37,922,714 | 115,733,430 | ||
| Nordea 1 – Global Climate & Envir BI EUR | 4,697,457 | -19,460,150 | 126,905,611 | 3,632,187 | -33,005,199 | -54,691,231 | ||
| Northern Trust Wld Cstm ESG EqIdx A EUR | 3,990,590 | 89,021,307 | 15,313,035 | -28,734,257 | 1,242,497 | 118,838,561 | ||
| iShares MSCI USA SRI ETF USD Acc | 297,507,902 | 144,893,585 | 189,840,586 | -179,408,711 | -86,777,780 | 76,351,964 | ||
| Blackrock ACS World ESG Eq TrkrT2GBPAcc | 22,068,869 | 193,586,445 | 82,713,226 | 273,469,381 | 154,773,745 | 217,491,888 | ||
| Carmignac Patrimoine A EUR Acc | -334,017,903 | -141,293,938 | -145,647,584 | -37,349,166 | -110,134,548 | -331,758,854 | ||
| Pictet-Water I EUR | 7,163,419 | -20,348,568 | 31,221,555 | 51,399,169 | 9,764,080 | -5,194,034 | ||
| Stewart Inv APAC Ldrs Sstby B GBP Acc | -7,855,247 | 14,112,015 | -72,489,671 | -50,556,253 | -36,549,102 | -22,068,862 | ||
| Pictet – Global Envir Opps I USD | -95,522,823 | -219,976,321 | -87,267,762 | -31,434,442 | -111,766,500 | -84,778,307 | ||
Source: Morningstar
ESG is the civil service at work playing in capital markets. Mark Carney was supposed to be a clever banker but he was advocating it.
Artificially rig a market and you’ll always get bitten. Make it semi-compulsory to allocate assets in a particular way, and those with no such shackles will bet against you all the way into the ground.
These days, politicians, councillors, civil servants and the whole merry band of people who play with OPM never tire of rigging a market only to find it explodes in their faces. Just look at the losses racked up by Surrey and Woking councils as their councillors thought they were property magnates. When private equity started to do the old propco/opco and double the rent double the property value wheeze, those of us hard boiled business folk must have wondered what fools bought all the pumped up Debenhams real estate. Turns out it was Surrey County Council amongst others.
Well said
It would be fair to point out in this article that “Net Zero Watch” is a climate science denial group. Its views should be fairly aired, but we should be aware of its conflicts and its counterintuitive name.
Now perhaps we can back to what really counts in the financial arena – profit. Leave saving the planet to the politicians. (heaven help you!) As long as it is legal that’s all you really need concern yoursef about governance.
ESG doesn’t really have a current form. It should stand for ‘doing something good’, doing it properly & without causing too much damage. Potentially there could be an ESG arms manufacturer.