ESG is a cynical value trap
Have you got your ESG investment? Do you get a tiny warm glow knowing that your Widow’s Mite is nudging the world’s big businesses towards better behaviour? As with the song of the Old Dope Pedlar, who is doing well by doing good, money has been pouring into ESG, and almost every advertisement from open-ended funds soliciting capital burnishes their green credentials. Many of them promise to invest only in companies that meet environmental, social and governance standards, implying that investors can indeed make an above-average return as well as saving the planet by buying these funds.
The suggestion is nonsense, of course. When an oil company sells its fields, the CEO may feel virtuous for producing less CO2, and be pleased to get the activists off his back, but the buyer has no intention of letting the black stuff rot in the ground, and a private company can get away with corner-cutting. If a bank decides not to lend to support any more mines, there are plenty of other lenders, and there is almost no evidence of so-called polluters having to pay a penalty interest rate in the bond markets.
It may be nonsense, but it is convincing nonsense. The primary task of a fund management business is not to enrich the customers, but to gather more capital. If looking green brings in the dosh, then green the business will look. Depending on how you measure it, funds in the US promising good ESG behaviour now cover a third of all funds under management. So is ESG marketing just “cynical, and occasionally meaningless, jargon aimed mainly at asset gathering and fee optimization, as opposed to any useful social or societal objective”? Michael Edesess certainly thinks so. Amplifying his work in Advisor Perspectives, William Bernstein has analysed ESG and non-ESG funds in the US run by the same management houses. In “The futility of ESG investing” he concludes that the non-ESG funds outperformed the others. It’s likely that the same would apply in the UK.
This is not merely a short-term effect. Mr Bernstein’s analysis of sector performance over the last century puts tobacco and alcohol in the top five out of 40 categories, despite decades of efforts to demonise them. “No matter how much you or I might abhor companies that pollute the planet, gouge the sick with criminally high pharmaceutical prices, produce dangerous weapons for public purchase, or poison our democracy with dangerous conspiracy theories, we can’t make the shares of those companies disappear; someone will own them, and the more abhorrent those companies are, the higher the return those shareholders will reap.”
It’s no wonder that retail investors, or indeed activists, are confused. A recent survey showed that two-thirds of those calling themselves professional investors struggle with defining exactly what ESG means, because the agencies that offer to rate these qualities produce wildly different scores at company level. When the Association of Investment Companies asked investors what they considered most important, ESG came fifth in their priorities.
Duncan Macinnes at fund managers Ruffer has a slightly different explanation for thinking that oil company shares are not the ESG villains they are routinely painted. His portfolios are overweight oil, on the argument that the crude price will continue to reflect the lack of new supplies as the majors wind down exploration to provide the financial fuel to invest in renewables. Mr Macinnes guesses this will release $20bn over five years for BP alone. Some, perhaps much, of that will be wasted, but if the company really can emerge as a champion of green energy, those dumping the shares today might look rather foolish.
Primark: dearer than the clothes
There were many warm words this week for Associated British Foods, better known as the owner of Primark, purveyor of dirt-cheap clothes to the masses. It has been quietly expanding into the US, that graveyard for UK retailers, and so far, so good, doubtless helped by its pledge to stay this side of the Mississippi river to avoid overstretch.
ABF is controlled by the Weston family, and is famous for taking the long view (and for resisting pressure to spin off Primark from British Sugar and its other food interests). It is now rewarding shareholders with a new, more expansive, dividend policy, which was good for a 10 per cent jump in the share price. Yet for all the plaudits about what a good company it is, ABF shares have not been a great investment. Investors who missed the jump in the price in 2012, as the market woke up to the prospects for Primark, have endured a negative total return according to Morningstar.
This is a fine company, and a worthy flag-carrier for British retailing. It may be a leader when it comes to ESG. It may even conquer the world’s toughest retail market. It may indeed be at “an inflection point” as the veteran Clive Black at Shore Capital averrs, but at £20 a share, a price first reached eight years ago, it is already priced for something close to perfection.