The Magazine for Asian Investors
ESG, or Environmental, Social, and Governance, is gaining more and more acceptance in society. Institutional funds are springing up like mushrooms. There are now over 600 so-called ESG funds. The total value is now around $30 trillion, an increase of 34% since 2016.
In recent years, we’ve seen technology stocks come into focus for investors, especially during the COVID-19 crisis. The 10 highest-yielding U.S. large-cap funds invested 17% in FAANG stocks.
ESG-focused funds also invested heavily in FAANG stocks. The 10 return strongest ESG funds with about 19% invested in FAANG stocks.
This may lead to some skepticism about the term “sustainable” mutual funds, given their heavy emphasis on large technology stocks. Amid a wave of criticism of these companies for violating user privacy. Unfair treatment of workers and monopoly behavior highlights the importance of distinguishing between ESG investing and socially responsible investing (SRI).
By definition, ESG investing is primarily concerned with monetary returns. It is an investment to increase returns by limiting investments in companies that are vulnerable to environmental policy risks, Society and Governance, or companies that do not have such policies at all.
On the other hand, ESG investing is no different from choosing to diversify investments across asset classes or choosing to invest in bonds that are attractive for investment (investment grade bonds) to minimize risk. To achieve the highest possible risk-adjusted return (risk-adjusted return).
SRI investing, on the other hand, has a broader meaning than ESG, it is an investment that limits investment in a company or type of business that does not fall under established ethical guidelines.
But in practice, the above definitions are still very vague. Even at the government level, there is disagreement on this. The U.S. Department of Labor has proposed a new draft rule that would prohibit pension funds from investing in ESG funds. The draft rule was created to ensure that investor returns are the primary consideration for pension investments.
Take Facebook as a case study.
Facebook has long been under criticism for persistent personal data security issues. In 2018, it was revealed that Facebook user data was shared with analytics firm Cambridge Analytica, affecting more than 87 million users. This includes the boycott of Facebook ads by major companies such as Coca-Cola, Starbucks, and Ford Motor. This is due to Facebook’s inability to deal with hate speech or misinformation, leading to misunderstandings and divisions in society.
In addition, the U.S. Congress has subpoenaed Facebook executives to provide information and answer questions regarding allegations of antitrust and unfair competition. As a result, Facebook shares were removed from the S&P ESG Index in June 2019 and are not listed on the Dow Jones Sustainability Index (DJSI).
However, Facebook founder and CEO Mark Zuckerberg has not paid much attention to the criticism. The unique two-level shareholder structure crucially limits the say of ordinary shareholders and gives Zuckerberg unlimited power at the top of the company. For shareholders, there is of course a risk here as to whether management always acts in the interests of shareholders or prioritizes its own interests.
On the other hand, Facebook is known to stand for environmental protection. Even if Google is the first of the tech giants to invest in renewable energies (solar energy), Facebook is considered a pioneer of the Green Data Center.
Facebook opened its first Green Data Center in Prineville, Oregon in 2011. Energy conservation was a key focus during construction. The data center design is made available for other companies to participate in through the Open Compute Platform.
Currently, about 200 companies are participating in the program. Since 2020, the data centers have been powered 100% by renewable energy.
The data centers are currently located in Lulea in Sweden and Altoona, Iowa in the US.
Although funds claim to focus on ESG, there are major differences in interpretation. Investors should look carefully at which equities the fund invests in. Specifically, ESG-focused investors should be clear about their orientation.
In the case of Facebook, the limited does pose a risk to shareholders. On the other hand, Facebook is actively trying to protect the environment. However, companies that want to embed ESG in their culture should focus on the full spectrum. Just because good work has been done in one area doesn’t mean other areas can be ignored.
Therefore, investors who want to invest in funds that focus on ESG factors should ask themselves the following questions:
- What are the fund manager’s investment selection criteria?
- What is the level of focus on ESG issues?
- How do you balance the weight between generating business returns and social responsibility?
We believe that any approach on either side is too extreme. It could be an unsustainable approach.