Even those who are sceptical about the headlong dash for investing in anything with an ethical slant should nevertheless seek to make money from the trend, I suggested earlier this month (Bearbull, 16 October 2020). It is therefore only fair – perhaps even ethical – that I should suggest some specific ways to do this.
First, however, here is a suggestion about what investors should ignore among the vast range of index-tracking exchange traded funds (ETFs) that cater to this taste – almost any fund with the initials ‘ESG’ somewhere in its name. Most readers will know ESG stands for ‘environmental, social and governance’ and, in effect, has replaced ‘ethical’ as the defining epithet of acceptable investing. The problem is, first, that the proliferation of ESG ETFs, apart from making an inedible alphabet soup, is so great as to make ESG funds that track the same regions largely indistinguishable from each other. Second, the barrier to entry to ESG status is too low. Shares in the companies comprising an ESG index are likely to be the same shares making up an overall market index minus the components of a few socially unacceptable sectors, rejected for rather arbitrary reasons. This means it remains unclear whether ESG indexes will continue outperforming the broader based indexes from which they are derived when they lose their popularity, which will happen.