ESG: What’s good for investors as the bear market bites?

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The “Greed is Good” days of the Eighties are long gone from the capitalist psyche, nevertheless, as the bear market bites, what will become of ESG? When Gordon Gekko said “you need a friend, get a dog” he wasn’t suggesting his protégé Bud Fox get an emotional support animal for the office to boost mental health and well-being.

Michael Douglas’ iconic 1980s Wall Street character was not progressive. And, if he was real, it would be very unlikely that he would be an ESG evangelist (spoiler alert – Gekko, in the less famous 2010 sequel, scams a US$100mln investment intended for an ‘abundant clean energy’ project).

The “Greed is Good” days of the Eighties are of course long gone from the capitalist psyche – well, if not gone, then rebranded. It was a very different, tougher allegedly less conscious and less socially responsible time.

Nevertheless, economically, things are now looking decidedly retro what with soaring inflation, international fuel crises, and a cold war with Russia.

As the economics regress, one wonders whether capitalism’s sometimes uneasy relationship with environmental, social and governance (ESG) is at risk of regressing with it.

Right now, there’s a war going on, fuel prices are extremely high and most of the millennial growth stocks are being hammered in the first bear market that most users of the Robinhood app have ever seen. Billions have been lost in recent months through crashed investments in cryptocurrencies, non-fungible digital assets and even virtual reality real estate (I kid you not).

Meanwhile, many dyed-in-the-wool traditional investors have employed classic strategies of the past – namely buying gold and switching to the typical defensive stocks. That mostly means favouring hard, tangible, current-day fundamentals, and most importantly means renewed emphasis on income and yield focussed investing.

If prioritising cash returns today is the response to the current macro-economic and geopolitical predicament, what does that mean for the ESG movement?

Most of the traditional defensive stock choices come with inherent compromise, especially for stricter ESG investment strategies, though the partition lines drawn around the ESG investing concept can appear quite blurry.

Some of the world’s largest hydrocarbon producers are now also the biggest investors in offshore wind, for example. So where does the imaginary barbed wire fence go up?

A new survey by JP Morgan really spells out this current blurriness between what is and what isn’t sound for ESG.

The American bank interviewed 82 respondents, of which 46% described themselves as ESG specialists. The remainder were generalist investors. In the survey 76% of generalists agreed that rising interest rates and the shift from growth to value investing posed a ‘cyclical issue’ to ESG investment strategies.

In other words, they are saying that under current market conditions such an approach would underperform. Only 25% of ESG specialists agreed with that sentiment.

More than three-quarters of the investors responding to JP Morgan confirmed that, in their firms, ESG considerations excluded investments in specific companies and sectors.

Specifically, JP Morgan pointed to companies linked to weapons, nuclear, thermal coal and unconventional oil and gas as the type of investments that would be off the menu for ESG minded fund managers. Albeit the American bank acknowledged some investors may have “far more nuanced strategies”.

There’s another somewhat egregious old stock market ditty, this time not from fiction, which goes something like “when bullets fly its time to buy”. Whilst this is not brand friendly in the era of ESG, it is something of a truism.

Unsubtle and unpleasant as it is, war is good for business if you’re in the business of making weapons, munitions, missiles, rocket technology and all manner of other military and defence technologies.

Given that times of higher demand tend inherently to coincide with volatile, higher risk and uncertain periods, perhaps it should be obvious that such investments are a financially attractive choice for defensive portfolios.It’s even more obvious that such investments aren’t easily compatible with at least one of ESG’s three pillars (and most cases, most are probably environmentally unfriendly too).JP Morgan’s survey concludes as many as 81% of respondents don’t expect to remove exclusions blocking ESG investment into defence companies – though it is worth noting that 4% said they already had, and 15% said they may be considering it.It’s a different story when it comes to energy, as around half of JP Morgan’s respondents believed that exclusions against fossil fuel connected companies could evolve as a result of the current energy crisis, and, only 28% did not.Unsurprisingly, that point-of-view skewed with 60% of generalists expecting the change and only 39% […]

source ESG: What’s good for investors as the bear market bites?