The Wall Street Journal criticized ESG portfolios earlier this month for being dominated by big technology stocks. But we think technology stocks are integral to a responsible investing agenda when chosen as part of a well-defined process targeting companies that foster environmental, social and governance (ESG) improvements.
According to the WSJ article, published on February 10, sustainable investing funds are guilty of false marketing because they don’t necessarily invest in companies that sell wind turbines or promote diverse boards. “Many of them look a lot like a portfolio of big technology stocks,” the author wrote.
Citing a report by RBC Capital Markets, the WSJ noted that the five most commonly held S&P 500 stocks in actively managed sustainable equity funds are Microsoft, Alphabet Inc., Visa, Apple and Cisco Systems. Companies like NextEra Energy, the world’s largest operator of wind and solar farms, are underrepresented in ESG funds. These findings, the report says, reflect a major frustration of socially conscious investors because the industry lacks a rulebook for ESG funds.
The report misses the mark on three fronts, in our view. First, it advocates a very narrow definition of ESG issues and funds. Second, the report fails to acknowledge the central role technology companies play in driving ESG improvements. Third, the article fails to recognize the alpha opportunities that active managers have when owning competitively advantaged companies focused on sustainability.
What Are ESG Issues?
Socially driven investors want to help make the world a better place. But expecting sustainable funds to only invest in companies that “fight climate change, develop wind turbines or promote diverse boards” is a mistake, in our view. It’s also a common misunderstanding. Many investors are grappling with defining ESG issues. The article implies that only a narrow list of ESG issues are legitimate, but the opposite is true. Sustainable development touches all facets of society.