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How The Conversation On ESG-Friendly Sectors Is Evolving

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Environmental, social and governance (ESG) issues have been permeating the financial markets for years, and they will only get more and more popular as the years go on. Fund managers are being forced to face off with ESG — whether they like it or not.

As a result, the adoption of ESG policies has come in fits and starts as fund managers deal with the challenges of applying such policies to their strategies without hampering returns. Thus, the need for conversations about ESG adoption by fund managers has reached a fever pitch.

Evolving views on defense stocks and ESG

Peltz International published the results of an ESG-focused survey earlier this year. It found that ESG investments account for about one-third of all professionally managed assets. However, hedge funds have been lagging behind other types of asset managers. Eurekahedge’s ESG hedge fund index contains only 65 funds — accounting for just 3% of all hedge funds.

Discussions about ESG have evolved over the years, starting with the most fundamental discussions about environmental or social issues. This year, the topic of defense and weapons stocks has been pulled into the spotlight. Traditionally, such stocks have been heartily excluded from ESG funds due to the nature of what they sell.

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However, Russia’s invasion of Ukraine has changed ESG proponents’ perspective of the sector. Suddenly, defense stocks appear more ESG-friendly because Ukraine needs weapons to push Russian forces back.

Traditional energy now appears ESG-friendly

Another sector ESG managers are changing their views on is energy. Of course, green energy has long been the emphasis in ESG funds with a focus on excluding oil majors and other traditional energy companies. However, Europe’s energy crisis due to its dependence on Russian energy is tweaking the conversation a bit.

Mark Lacey, who manages Schroders’ ISF Global Energy and Energy Transitions strategies, told the Financial Times that the ESG pendulum is shifting in favor of traditional energy companies. He explained that many of those companies “have been taking the net zero challenge much more seriously” since 2015 by investing in hydrogen and carbon capture technologies and related areas.

Additionally, the Ukraine war has shined a light on the need for a more gradual transition from traditional to green energy due to social reasons. Europe is scrambling for sources of energy as Russian cuts off the rest of the continent due to its opposition to Moscow’s continuing incursions into Ukraine.

European funds that apply ESG metrics to their holdings have historically been heavily underweight in oil and gas companies, but some signs of a shift are appearing. For example, Bank of America
BAC
found recently that 6% of European ESG funds now have Shell among their holdings. None of those funds owned the stock at the end of 2021.

Continuing the ESG conversation

On September 28 at 9AM EST, I will be hosting a live webinar where ESG will be the topic of discussion. Panelists will include Mike Chen of asset manager Robeco, hybrid fund manager Lefeng Lin of Southern Asset Management, journalist Nathaniel Baker, Huffington Post ESG consultant Joan Michelson, and Yale University lecturer Cary Krosinsky.

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The discussion will range from the basics of ESG, like how it should be defined to climate change, challenges in ESG investing, the energy crisis in Europe, and how to generate excess returns by applying ESG principles to holdings.

You can join the webinar here.

Source: Fox Business

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