April 3, 2020

Dangerous ESG and Index Funds

Good people invest in good companies, also in the ethical sense of the word. Does this happen at all when ecological, social and governance criteria are applied to ESG funds? Not really, as Obermatt CEO Dr. Hermann J. Stern points out in this part of his oikos Konferenz ‘19 Keynote at the University of St. Gallen.

The crux lies in the details. First, a good ESG rating doesn't mean that personal values are reflected in investment funds, as Stern showed in the second part of his presentation. ESG criteria are largely personal and therefore only individuals can apply these criteria correctly. Rating agencies cannot anticipate these personal decisions. As good as ESG criteria are, ESG funds are often a misleading label.

The much bigger problem, however, is that good ESG ratings lead to very distorted portfolios. Stern demonstrates this in his presentation using ESG funds from Blackrock, one of the world's largest fund providers. The sector distribution for the European Blackrock ESG funds was anything but reasonable because they put an excessive weighting on banks, an industry that stands on shaky ground in Europe at this time.

In his presentation, Stern also shows how index funds and ETFs only poorly reflect the actual market. These analyses are explained in more detail in the Obermatt Investing Handbook PDF, which subscribers to the free Obermatt Stock Update receive upon registration. Also interesting is the fourth contribution of the Insights series on ETF errors.

Recorded by Obermatt with kind permission of oikos St. Gallen, November 2019.

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