ZEUS: The inevitable rise of the anti-climate investing strategy

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Mr. Potter: “George, I am an old man, and most people hate me. But I don't like them either so that makes it all even.”

SAN FRANCISCO (Callaway Climate Insights) — The headline in The Wall Street Journal was too provocative to resist.

“Investment Options for the Unwoke”.

I clicked on it and found a thoughtful opinion piece by the chief executive of a group called 2ndVote Advisers, deploring the rise of environmental, social and governance funds with a “liberal” leaning, and advocating a return to investing strategies that focused on profit more than purpose.

Daniel Grant made it clear he “broadly supports diversity and inclusion,” but that the rush by the fund industry to embrace ESG had led to a “hot mess” of policies, restrictions and expenses that investors should weigh against the benefit of ESG funds. His company screened the S&P 500 list for signs of liberal leanings and found some 73% of the S&P 500 companies had them. So it built a fund to invest in the others, which he reported outperformed.

The proliferation of ESG funds and the flood of investor money flowing into them in the past six months was bound to cause a backlash at some point. Hot mess is a polite way of describing the confusion investors have about what constitutes an ESG investment. Microsoft (MSFT)? Amazon (AMZN)? General Motors (GM)?

Morningstar reports that climate-themed fund assets tripled last year to more than $177 billion. Out of more than 400 climate-aware, clean tech, or Paris-aligned funds and ETFs it examined, the vast majority were in Europe, though the U.S. and China were strong as well.

With equity markets at record highs, and the great debate among CEOs about whether social and environmental justice belong among corporate goals or not, it’s no surprise we’ll start to see a flurry of anti-ESG funds. Just as back in the 1980s — as funds started to pull back from tobacco companies — a segment of vice funds was launched to celebrate smoking, drinking, and gambling stocks. Performed OK, too.

As one fund manager explained to me at the time: “Things might be tough in the U.S., but there are a billion people in China who want a smoke and a beer, and so Philip Morris (PM) isn’t going anywhere.”

Whenever the pendulum swings too far in one direction, the market corrects. The rally in ESG funds and shares has been stunning. At some point, maybe soon, we’ll see a shakeout in the ESG market. But unlike the previous two bull and bear markets in clean tech over the past two decades, it won’t wipe out the segment. It will lead to a simpler, easier to understand hierarchy of top ESG funds, and investors will respond.

The factors promoting ESG investing are more than a fad, or a movement. They are the result of a rapid decline in costs of renewable technologies and innovations in battery power that is driving a generational change in industry, away from fossil fuel companies and toward different types of energy.

The potential for these companies to make money is what is driving investment in these products, not just the fact that they lean toward doing good. Tesla (TSLA) is the ultimate example, having just reached profitability. Other automakers aren’t building electric vehicles because they want to save the world. That’s just where their future market is going, and they are responding.

The trend among major companies to declare net-zero goals, highlighted this Earth Week, is also not going away. From financial firms to tech, auto, travel, real estate, etc,. the rising focus on decarbonization will drive corporate directives for years to come, and therefore affect performance one way or another.

It will be interesting to see where this backlash takes us, in terms of different ideas for investment products that shun climate or social issues. One banker I spoke with about this jokingly suggested a “Mr. Potter fund,” after the Lionel Barrymore character in “It’s a Wonderful Life,” dedicated to pure pursuit of profit over purpose.

“What does that get us?” Potter infamously said in the movie. “A discontented, lazy rabble instead of a thrifty working class. And all because a few starry-eyed dreamers like Peter Bailey stir them up and fill their heads with a lot of impossible ideas!”

Potter would be shorting the hell out of ESG right now, starting with the electric vehicles companies and alternative meat providers. But he would be wrong now as he was back in the ‘30s.

Impossible ideas are the currency that drives markets and rewards investors willing to bet on them. The idea that Wall Street can fund business plans that fight global warming and make a fortune at the same time isn’t impossible at all. Like the anti-ESG funds, they’re just making a market. Investors will decide which way to go.

Not with their hearts or their heads. But with their cash.