Does ESG outperform or underperform?
European investors’ net allocations to ESG ETFs have almost halved to ~€7bn in Q1 24 vs Q4 23, with sales down to just 16% of total ETF inflows during the quarter, compared with 29% in Q4 23 and 65% at the height of investor ESG euphoria in 2022 (see here).
According to Morningstar, ESG investing appears to be going through “a period of existential crisis” as investors have allegedly become concerned about the underperformance of ESG investments.
Yet, performance, as beauty, is often in the eye of the beholder. All of our funds are ESG compliant – actually, they are more than that, they are also Article 8, 8+ or even 9 SFDR. But not because we claim that ESG outperforms. Whether or not it does, it mostly depends on the data used to assess performance. As Chicago’s Coase once famously claimed, “if you torture the data long enough, they will confess to anything”.
For us, all what ESG & SDG investing does is providing portfolios with a superior risk/benefit profile (which is no small feat). In our view, ESG helps reducing regulatory, political and legal risks (in the sense of helping avoid courts and potentially huge legal bills), while SDG ensures investments in high-growth sectors (helping avoid old economy’s value traps).
Our ESG approach is also so to speak “macro”, meaning that we don’t invest in autocracies (which helps avoid all sorts of risks), nor we invest in those countries which are in FATF’s grey list for money-laundering. With no ifs and buts, we also exclude from all our funds sectors such as tobacco and weapons – no matter how these sectors are “improving” from being deadly to being less deadly.
This brings us to a final, but not less important feature of our ESG approach: we don’t just “screen off” potential portfolio holdings based on external ESG-score providers.
For 3 main reasons: for starters, these ESG-scores vary dramatically from one to another provider; they are often not available for the micro, small and mid-cap companies in which our funds frequently invest; and finally, they are often quite puzzling. For example, S&P Global’s latest ESG score for Philip Morris, whose cigarettes continue to cause ill health and death around the world, is 85 out of 100, while the score for Tesla, with its transformational contribution to the shift away from fossil fuels, is just 40! (as well explained here).
So how do we do it? We use an integrated approach, combining our own, proprietary sustainability analysis (both quantitative and qualitative) with intensive corporate engagement, mainly aimed at accompanying small and micro-caps (which have more limited resources) on their paths towards sustainability.
Further details of our approach here and here.
This is a marketing communication intended exclusively for institutional investors. Refer to Fund Prospectuses & KIDs before making any investment decision.
For any questions email us on: info@nicheam.com
Follow us on LinkedIn: www.linkedin.com/company/niche-am
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