ESG is more than just a fad

Are you watching the third series of Industry, the hit TV show set at a fictional investment bank? If so, one theme of the first couple of episodes may have given you pause for thought – greedy executives at the bank are fixated on how to make money out of the “fad” for environmental, social and governance-themed investments before the markets lose interest.

Do real-life investment professionals share the cynical view of ESG expressed by the deeply unpleasant partners at “Pierpoint”? It is to be hoped not, but there has certainly been a debate about the investment merits of ESG – and concern about issues such as greenwashing, where false claims are made about environmental credentials. New rules introduced this year by the European Union, requiring much greater transparency at ESG funds, are just one part of that story.

In this context, it was interesting to see the announcement this week by Baillie Gifford that the investment trust it manages, Keystone Positive Change, is to be wound up. The fund’s investors will be able to take cash out of the fund or have their holdings rolled over into a similar open-ended fund also run by Baillie Gifford. 

Is this a sign that ESG investments are not all they’re cracked up to be? That would be worrying, given the huge flows of money we have seen into such funds over the past five years.

Well, the Baillie Gifford announcement does follow a disappointing period of performance for the investment trust, which invests in companies that have a positive social or environmental impact. However, while there have been some stock specific issues, it’s not been the ESG theme here that’s been the problem; rather Baillie Gifford is a “growth” investor, backing stocks with significant potential to outpace the market, and this style has been out of favour in recent years.

Moreover, across the rest of the investment trust industry, funds offering exposure to different ESG themes continue to perform strongly and to attract plenty of attention from investors. And there is no shortage of choice, from specific Environmental funds to those offering exposure to renewable energy, and to other types of green infrastructure.

Indeed, investment trusts can be a smart way to increase ESG exposure given the nature of many of the opportunities in this area. ESG investments such as big green infrastructure projects are often illiquid; small companies doing interesting things may be volatile. The structure of an investment trust – a closed-ended fund that offers liquidity in its own shares through daily dealings on the stock market – provides a safer way to access such investments.

More broadly, the question of ESG as a “fad” is a debate investors will need to wrestle with for themselves. Still, in a world where there is broad consensus that climate change must be tackled – and with huge investments already committed – it seems obvious that there will be opportunities for investors. Equally, areas seen as detrimental from a climate change perspective – fossil fuels, most obviously – are already seeing reduced investment and hazards such as extra taxes and environmental levies; that represents increased risk for investors.

Against this backdrop, the attitudes portrayed on Industry feel rather outdated. In many ways, the ESG movement is now a self-fulfilling prophecy – the huge capital sums committed to sustainability-related investments are creating opportunities that it would be a shame to miss out on. In which case, even after Baillie Gifford’s announcement, there are many investment trusts to consider.