Isaac Newton was a successful investor, but he lost a fortune (£15m in today’s money) in the South Sea Bubble. When asked about his misadventure, he supposedly replied that he ‘could calculate the motions of the heavenly stars, but not the madness of people’ (presumably, himself included).
The rise and fall of South Sea stock was one of the earliest and largest instances of a market bubble and crash. Exactly 300 years later, we’re facing another massive investing trend. In the last year or so, almost every investment institution has jumped on the sustainable bandwagon.
It’s now more notable to find an asset manager who hasn’t committed to sustainable, ethical, responsible, impact and/or ESG (environmental, social and governance) investing than one who has. And in August this year, assets in global ESG exchange traded funds and products topped $100 billion.
Not only has this trend been bolstered by the increasing desire of investors (retail and institutional) to see their money have a positive impact, but by continual reports that ESG funds appear to be outperforming ‘traditional’ investments. Surely, this can only be a good thing? Well, only if you know what you’re buying.
As discussed in a previous blog, ESG investing suffers from complexity, lack of transparency and a lack of any universal standard. In today’s climate, ESG terms can lawfully be used to label pretty much anything, so it’s no guarantee of good practice. This has led to a glut of ‘greenwashing’, i.e. investment products being described as green, ethical or sustainable but the description is unsubstantiated. And while the top financial performance of ESG funds seems uncontroversial, you need to dig a little deeper. Many ESG funds are heavily weighted in favour of technology companies, which typically have low carbon emissions. These stocks rocketed in 2020 largely due to Covid lockdowns; it had nothing to do with the stocks’ ESG credentials.
The EU, the UK and the US are all working on their own strict definitions of ESG. This should go some way to clarify what you’re getting when you choose an ESG or sustainable investment product. However, these will take a while to implement and there will still be no global definition.
It would seem many people are pouring money into investments when they don’t know what they’re buying. That’s nothing new. But underneath the ESG label lies something meaningful, worthwhile and, above all, valuable for the world in which we live – environmental, social and governance best practice.
The question remains, is it a bubble? A bubble exists if ESG investments are over-valued (i.e. over-bought). Right now, ESG funds may be in bubble territory because many of the underlying stocks that make up the funds are themselves in a bubble.
But does that make it an ESG bubble? If it is, when do you call it?
Historically, in all bubbles – whether they be tulips, canals, railways, the internet – no-one knows. And if we knew this time, we’d be sunning ourselves in the South Seas instead of writing this blog.
Happy holidays, everyone!
Sugi is a world-first app that shows retail investors the environmental impact of their investments and helps them go greener.