Sustainable Investing - Eat what you value, not ESG!
Sustainable Investing, including ESG (environmental-social-governance) and its ilk, is the investment thesis of the moment. The Climate Debate and ESG is beset by definitional arguments. The science is not crystal clear, also the cacophony and plethora of the metrics and pitches can be dizzying.
Conscientious investors should consider understanding better the trade-offs of such investment strategies. Individual actions (investing and dietary) as well as being sceptical about an ESG fund’s claims is a start
Inconvenient facts about food
The single most damaging human activity to the Environment is food production (and its consumption); viewed as an and-to-end process (land use, operations logistics, etc) accounting over 25% of all Green House Gases (GHGs) generated.
Meat & Dairy products being the worst foods. These rank above Fossil Fuels and Fast Fashion. The producing & consuming a kilogramme of beef produces 60kgs Co2 of GHGs (60 times more polluting than peas). In “impact terms”, across the food process chain, Farming Land Use and Operations account for 80% of that figure. Transport less than 10%.
The rub is that even eating local doesn’t really ameliorate the situation. A study showed that just substituting ONE day a week of Beef & Dairy to Chicken/Eggs/Fish or had more impact than buying ALL one’s food from local sources.
It makes the shrill calls with regard to restrictions on air travel and transport misplaced; move over Greta!
Furthermore, according to the ‘FT’, the moral fallacy of sustainable investing has not been resolved.
Inconvenient truth about ESG: not fit-for-purpose
The amount of investments into ESG funds is immense and has been growing rapidly, its currently stands at $41 trillion.
Yet, many ESG investment funds may not be fit-for-purpose: with regard to sustainable impact nor their financial returns.
Few of the ESG funds seem to have any direct, positive climate impact; such as reducing GHGs. Rather they address the disjointed raft of measures and box-ticking of various bodies. Also, the composition of the funds’ investments are weighted towards established traditional firms as well as the Tech sector. Is Volkswagen really a green investment? Does the ESG hype lead to inflated valuations: a la Tesla?
Also, the currently promoted claims of ‘out performance’ by ESG funds is questionable.
An increasing number of studies reveal that the performance of ESG funds has been unimpressive. One of many recent studies, suggests that the occasional outperformance is driven mainly by funds’ reductions in expenses, exposures to certain industries and factors. According to a JP Morgan report, after controlling for style factor exposures, the majority of funds in any of the tested ESG categories does not produce statistically significant positive or negative gross alpha.
Some high profile and experienced “Social” investors see ESG investing as financial marketing hype and as a “complete fraud”.
Not all ESG funds are questionable, yet the landscape is confusing. Would-be Green investors should really press their advisors to dig deeper into the activities of the underlying investments and their true impact.
One can be a Green investor
“Green” investors can have impact immediately; starting at home – literally.
For the individual, this would mean reducing (even eliminating) Meat & Dairy items from one’s meals. For example, a 90% reduction in the consumption of meat by US and UK nationals would be a major and lasting step toward effecting Climate Change.
Furthermore, investing in companies that develop alternative food sources across the full process chain and associated production seem to have more impact than the vast majority of ESG funds being touted by financial intermediaries. There is no need for FOMO. Choose wisely!
Within this scope, the beneficial owners and ‘patriarchs’ of Family and Private Offices (FPOs) are uniquely placed to have a disproportionate, immediate and longer lasting positive environmental impact than many other green investors – a true legacy. “Sustainability” is the legacy mantra for over 62% of FPOs surveyed. Chamath Palihapitya, a FPO voice on the sustainable investing spectrum, summarised the FPO challenge well.
“If you really believe in climate change you need to do a lot of work now”. “It’s going to be very important for you to really be able to diligence the supply chain, all the way down to the supplier and supplier’s supplier, and that’s a very hard thing”.
Real research, not lazy ESG funds’ relative assessment.
A call to action
Individual actions matter: as a citizen and investor.
Eat what you value. It is possible to change one’s consumption to a carbon-free diet and have and an immediate positive environmental and health impact.
If investing in Sustainability – choose wisely and directly.
Go green!
RISK WARNING
The views expressed are those of the author alone – no advice nor recommendation is provided nor implied. Investing in any financial instrument carries risks. Your capital may be at risk. Certain investments maybe long term and may not be readily realisable. Please consider all risks before investing. Gate Capital Group Ltd is authorised and regulated by the Financial Conduct Authority (FCA Number 189170).