ESG funds favor tech and Starbucks but don’t like oil or Facebook.
Photo: Richard Drew/Associated Press
Funds that promise environmental, social or governance improvements are a strange bunch: They hold more in technology stocks than the wider market, but are underweight Apple, Amazon.com and Facebook, three of the biggest.
They hold far less in oil companies than the norm, but are overweight Baker Hughes, a vital supplier of oil-drilling equipment and services. Starbucks, a small fry in the S&P 500, is the fifth-most popular stock with U.S. ESG funds classed as buyers of large companies. Meanwhile, electric-car maker Tesla isn’t that popular with ESG managers.
Digging into the holdings of ESG funds should help identify where the flood of cash pouring into supposedly sustainable funds is headed and so which shares might benefit. There is a lot of discussion among investors of whether the new popularity of ESG funds will pump up the value of tech stocks and hurt oil shares and the stocks of other carbon-intensive companies. The answer so far seems to be no, but that could change.
The detailed holdings mostly show that ESG funds don’t agree on much—except that they don’t like oil or Facebook.
ESG vs. the Market
ESG funds that focus on U.S. large companies on average hold a bit more in tech stocks and less in energy than the S&P 500, but adding all of the portfolios together shows a bigger difference to the market in aggregate.
Average fund holding
Share of all funds’ assets
S&P 500 weight
100
%
Energy
Utilities
Real estate
Materials
Consumer
staples
80
Communication
services
Industrials
60
Consumer
discretionary
Financials
40
Health care
20
Technology
0
Average fund holding
Share of all funds’ assets
S&P 500 weight
100
%
Energy
Utilities
Real estate
Materials
Consumer
staples
80
Communication
services
Industrials
60
Consumer
discretionary
Financials
40
Health care
20
Technology
0
Average fund holding
Share of all funds’ assets
S&P 500 weight
100
%
Energy
Utilities
Real estate
Materials
Consumer
staples
80
Communication
services
Industrials
60
Consumer
discretionary
Financials
40
Health care
20
Technology
0
Average fund holding
Share of all funds’ assets
S&P 500 weight
100
%
Energy
Utilities
Real estate
Materials
Consumer
staples
80
Communication
services
Industrials
60
Consumer
discretionary
Financials
40
Health care
20
Technology
0
To try to work out what is going on, I examined the positions at the end of last year of 219 U.S. mutual and exchange-traded funds classified by Morningstar as integrating ESG into their investment process or focusing on sustainable themes or sectors. They include active, quantitative and index-tracking funds, some broad and some, such as the recently launched Karner Blue Animal Impact Fund, with narrow goals.
At a sector level, the biggest differences to the S&P 500 among the ESG funds classified as buyers of large U.S. stocks—adjusted to exclude their many non-S&P holdings—are that on average they hold more tech and less communication services and energy than the index.
At 24.7% in tech, the average ESG fund held about 1.6 percentage points more than the S&P 500, almost all offset by far smaller positions in Facebook and AT&T, both in the communications sector. In energy, it should be little surprise that oil major Exxon Mobil is deeply unpopular, while Baker Hughes is the sector’s most-widely-held, appearing in 44 funds and on average held at three times its (small) weight in the S&P.
The most popular stock is Microsoft, just as it is with non-ESG investors. (Microsoft is the biggest company by value.) Among the least-popular U.S. stocks of any size are tobacco producers, gambling stocks and makers of controversial weapons such as Boeing and Textron, excluded by the conditions of many of the funds.
The trouble with working out where inflows will go is that no one buys the average. Among the 219 funds, half managed under $100 million at the start of the year. Look instead at the aggregate of holdings, so that the choices of the biggest funds make the most difference, and they are even more heavily overweight tech, again mostly offset by being underweight in Facebook and AT&T.
Unlike the average fund, though, the big funds hold much less in financials than the broad market, due to the near-absence of Warren Buffett’s conglomerate Berkshire Hathaway, classified as a financial stock. Mr. Buffett has been scathing about ESG, and Berkshire operates coal-fired power plants.
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Why do you think ESG is wary of Facebook and Tesla stock? Join the conversation below.
ESG funds in total had only $112 million of Tesla stock at the end of last year, much less than if they merely tracked the Russell 1000 large-stock index. (Tesla is excluded from the S&P 500 due to a lack of profitability.) Tesla’s startling rally since last summer hasn’t been supercharged by ESG fund buying.
The broad picture is that if new ESG money goes where current ESG money is, it should flow disproportionately to tech stocks, while Facebook, oil producers, tobacco and weapons makers mostly miss out.
But so far, the effects are indiscernible. In the energy sector, for example, there is no relationship at all between how over- or underweight ESG funds are and performance over the past year, the past three years or the price-to-book valuation. The tech sector, likewise, has no relationship between ESG weights and performance or forward price/earnings. Other factors are more important and, along with fees, explain why, on average, ESG funds underperformed the S&P 500 over both one and three years.
A word on the mathematics: To allow fair comparisons, I excluded non-S&P 500 holdings when working out the percentage held in a stock or sector. Include everything, and there are more than 11,000 stocks in the funds, many held in tiny amounts by ETFs tracking global ESG indexes.
Write to James Mackintosh at James.Mackintosh@wsj.com
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https://www.wsj.com/articles/esg-funds-mostly-track-the-market-11582462980
2020-02-23 13:03:00Z
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