Holier than thou ESG?

Blain’s Morning Porridge – March 24 2021:  Holier than thou ESG?

 “When you are thirsty and it rains, use buckets rather than thimbles.”

This morning – Demand for the EU’s Social Bond deal was strong as ESG funds scramble to find qualifying assets, but just how much ESG is enough? Has ESG got overly Woke?

The European Union heads up the most popular list this morning. It garnered over €96 bln of orders for its’ latest Social Bond issue, selling €13 bln of 5 and 25 year bonds which investors snapped up….. Why? Because zero coupon bonds are such great value? Or they are scrambling to fill their ESG bond buckets? Or because they believe rates are staying low and they’ve watched the ECB step up its bond buying to keep rates in check?

France, Italy, and even the UK, have been selling Green bonds – over €500 bln this year – promising to invest in good things like solving climate change and making the world a nicer place. The deals have been finding insatiable demand from green-asset starved investors. A syndicate manager from HSBC is quoted on BBerg: “ESG is increasingly a part of investors overall decision-making process for any security and there is a very strong focus on that topic”.

Blah, blah, blabbity blah blah… She said all the right things to get reported by a financial media obsessed with the woke imperative of being seen to be say all the right things about how important ESG is…

The reality is very different. The world is not a particularly nice place and saying ESG is good changes little. Words are words. Actions are actions.

She-Who-Is-Mrs-Blain and I are trying to do our bit to make things better, taking the view “a journey of 1000 miles starts with a single step..” Since we are committed environmentalists (well, sort of), love to do social good, and are currently rebuilding Blain Manor, we thought this would be the right time to launch our own Green-Blain Funding Programme.

Our new home ticks many of the sustainable boxes. Many readers will be surprised, but we are genuinely keeping it small – just the right size for two of us in our dotage, space for visitors, sustainable garden and living roofs. It will be clad in reclaimed and recycled materials. We’ve worked out what our new green home of the future really, really needs is lots of insulation, solar panels on the roof, a heat pump dug into the ground, all linked into batteries to future proof and green the house. Very laudable we think, good and very green.

Funnily enough, our bank didn’t seem to think so. They rather thought our demands for an ultra-low green zero-interest loan to finance some of the stuff was a bit cheeky. They suggested I apply for a mortgage – which they then told me wasn’t possible for the kind of home improvements we planned (apparently heat pumps don’t add to the value of home), but I could take a personal loan at some ridiculous rate to finance.

Or, thought I, I could simply flog the last of my Tesla shares… and after Cathie Wood of ARK said they are going to $3k and she just happens to be a massive institutional holder of the stock.. why not?

Meanwhile, wading through the actual technology on offer and trying to deal with a multitude of spivvy solar roof installers desperate to sell me their brand, while trying to determine the value of cavity wall estimates which ranged from £2k to £12k – I am convinced I ought to wait – the tech will get better. But if I wait the planet will get worse…

There is lots of talk about doing environment and social good, but try to do at ground level and it’s not so easy.

The issue of what Governments do with all the green funds they are raising is fascinating. With Europe lurching into a third lockdown, the question is how will the social bonds be distributed to mitigate the expected slowdown in European growth? I won’t saying anything about the botched rollout of the vaccine programme – because a couple of readers have said I’m anti-European (I’m not. I’m just saying the EC’s “Shunky Retreads” are incompetents.)

Does Europe spend the Social Bond money on immediate amelioration of the effects of Covid, or should they use it long-term to build better, green infrastucture? Should they give it to me to improve my carbon footprint?

The proliferation of green and ESG funds would apparently demonstrate people do care about the future? Of course we do – but personally, its mainly in terms of getting my pension paid, to be blunt. Where should investors be looking to place their money to do good and generate returns? It all boils down to a fascinating discussion on what are good and bad investments.

Y’day I was having an exchange-of-views/argument with a client about Deliveroo – she reckons the swift adoption of tech and new ways of doing things, means disruptive innovators are set to reap bumper returns. She reckons I’m a dinosaur who doesn’t get the pace of change in the way we lead our lives. I countered with an article I’d written a month before the IPO and highlighted my concerns it’s just a “Trend” stock, and since its future profitability looks limited what’s the imperative to buy it?

We then started arguing about ESG stocks – she thinks Tesla counts. I don’t. How do investment managers balance the need to be investing in good things while delivering world beating returns?

I was fascinated by a recent debate between fund managers:

The CIO (who happens to be from my age cohort) hazarded the opinion that a long-established, successful, but neglected stock making an 8% yield year after year, demonstrating stable and strong 4-5% growth metrics, looks like a perfect name to own. It’s got some associated risk – but so do all companies.

The company has done a superb job on delivering on its ESG objectives. It is well prepared for climate change, improving its water management and sustainable resources, doing social good in paying fair-trade and better to suppliers while boosting human rights across markets its active in. It ticks all the boxes for good corporate governance. It’s the classic low-risk, high probability “fat pitch”!

His colleague, a very able and clever younger fund manager, was horrified, but held his calm to point out there is a high likelihood today’s strong and stable story underlying the stock could very easily be de-stablised in the near future. He pointed out the risks of new health and safety regulations, and how the shift to ESG investments means a large number of real money accounts will no longer invest in the sector – puts its ultimate liquidity into question. He pointed out the whole sector is under the cosh from new corporate social responsibility initiatives out of global NGOs. He calmly described the stock as having a “uncertain outlook”.

I will leave it to readers to work out the stock, the sector or industry, but across the world it does strike me as extraordinary the contradictions across investments. On one hand the basis of Western Capitalism is Free Markets, Human Rights and Free Choice, but now we increasingly invest on the basis of rules which decide what is good and what is not?

The final comment from the CIO caught the mood perfectly – that a crunch is coming:

“I don’t want to be lectured on returns by hypocritical woke pension funds, or insurance funds telling me what is good for me and what will kill me. Guess what: Alcohol kills. Processed foods kill. Tobacco kills. Obesity and mental health kill. From now on I will only give ESG mandates to ESG mangers wo can prove they don’t drink, don’t do barbeques, are fit and not overweight, don’t gamble or game, and only drive electric cars that don’t use lithium batteries. The next virtue-signalling **** telling me what I can and can’t invest in will be…. [Expletive deleted]

The thing is they are both right.

As the old story goes; there was a 137 year old French lady. She was interviewed about the secret of her long life. She told the journalist: “I don’t smoke, I don’t drink, I’ve never gambled, I eat frugally, and exercise each day.”

He then asked: “does that mean you will live forever?”

“No, but it feels like it,” she replied in a resigned tone….

What is the point in life if not a good glass of Islay and fine Cuban stoogie… ?

Five Things To Read This Morning

FT – Suez Canal Blocked

BBerg – No Zoom on Friday! Citicorp Bankers Have Their WFH Prayers Answered

Bberg – Tencent Profits Beats Expectations Despite Crackdown

WSJ – Elon Musk’s China Charm Offensive Rolls with Praise for Climate Plans

Politico – China throws EU trade deal to the wolf warriors

Out of time, and back to the day job

Bill Blain

Shard Capital