ESG flows are fast diverging from true sustainability, unfortunately

Collecting £702m over a few weeks in Britain. Yes, it is possible: this is the amount of money that BlackRock’s £1.6bn World Low Carbon Equity Tracker fund has attracted since the beginning of the year. In comparison, its flagship Global Equity Tracker recorded £264m of outflows, according to the Financial Times.

This fund closely follows the performances of the MSCI World Low Carbon Target Index, itself aiming at “managing risks” in the transition toward a sustainable economy.

We have already criticized this way of conceptualizing sustainability (Whatever it takes to be (un)aligned), as it runs against what ESG stands for. Adopting a benchmark-investing approach risks giving a premium to not-so-green and not-so-social companies, as already observed in recent market pricing owing to vast herding.

ESG investors should instead remain pro-active and act independently from any index box, as the EU Commission’s work to give a common definition on what sustainability mean is still ongoing.

A look at the 10 top holdings of the MSCI “low carbon” index should trigger alarms for every ESG investor. Any professional can achieve “carbon emissions reduction” if it stays away (or underweight) from the most carbon intensive, but this misses the whole point of the “sustainable transition”.

Index replicating sustainable strategies are good at growing AuMs, not at promoting a shift to a better world. Dashing for indices runs against the fiduciary interests of savers.  ESG has still a long way to go when applied to fund managers.

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