Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
There is an old gag about a businessman who kills himself in order to reduce the tax he pays. As so often with humour, it highlights a serious side of human folly — in this case how extreme views can ultimately be self-defeating.
The joke has been on my mind this week. How else to rationalise that Nvidia is now the fourth-most commonly held stock in US ESG funds, according to Bank of America? It’s also widely owned in Europe’s most sustainable “article 9” funds, as reported in this paper’s Moral Money newsletter.
Nvidia designs the chips of choice for servers that run artificial intelligence software. Demand is booming. The US company also makes 80 per cent of the kit which allows such top-end AI processors to talk to each other. It’s all seen as green, as the virtual world is low on emissions.
Well and good except that many experts — from academics to tech insiders — believe AI poses an existential threat to mankind. These are no crack pots. On Wednesday, the European parliament voted to rein in AI technologies due to “significant risk of harm to the health and safety of persons”.
Now, I don’t know whether these experts are 100 per cent right or not. But it seems to me that any risk-aware approach to sustainable investing should at least take account of these new concerns about, well, our own sustainability.
There is no doubt that ridding the world of homo sapiens is the surest way of reducing man-made carbon emissions. But that cannot be the end point. Who would collect the dividends?
Alongside Nvidia, which makes up 2 per cent of the JPMorgan US sustainable equity fund, for example, Microsoft (partner of ChatGPT), Alphabet (Bard, cloud servers, DeepMind) and Amazon (servers) are all in the top 10.
Together they account for 18 per cent of the assets. In other words, almost a fifth of a sustainability fund is dedicated to companies that may be green but they put at risk the sustainability of the humans who invest in it by advancing the threat from AI.
All of this makes a mockery of ESG scores — both the ones that rank exposures to environment, social or governance factors as well as those assessing how green a company is. If AI wipes us off the planet, we won’t be around to measure the progress.
One can always tell when something popular has run its course when it becomes a parody of itself. Sustainable investing has reached this point. It’s comic that fossil fuel companies are excluded from funds despite keeping us alive, companies which could remove us from the face of the earth are included.
I say “could” because I cannot be sure. But, at the very least, sustainable investors should take note of the risks and not just pile in.
But this is not why I do not own any ESG funds in my portfolio, despite my previous job as head of responsible investment at a global bank. I have nothing against such funds, as I have written previously, provided the asset manager has an effective engagement team.
No, the reason I don’t bother is because I invest only in ETFs, and bog-standard ones usually have the same exposures as ESG ETFs for a much-reduced fee. They are basically the same products, and small differences in stock weightings are irrelevant in terms of real-world impact.
Take my Vanguard S&P 500 fund. Its five biggest stocks are identical to the closest ESG product Vanguard offers me — ESG North America All Cap ETF — and rank in the same order. They share eight of the top 10 holdings.
The ESG version excludes ExxonMobil, for obvious reasons, and Berkshire Hathaway, no doubt due to Warren Buffett’s private jet (which he sheepishly names “The Indefensible”). In their place is Tesla at nine and JPMorgan at 10.
But my fund has Tesla only two places lower down anyway, and with a slightly higher weighting. The percentages in JPMorgan — which has provided half a trillion dollars of capital to oil and gas clients since 2016 — are identical.
Likewise the price-to-book ratios of the two funds are the same (3.8 times) as is the average annual rate of earnings growth over the past five years, at 18 per cent. The ESG fund has a slightly higher price-to-earnings ratio, mostly due to an extra 6 percentage points in the IT sector.
But the total management and administrative fee that I pay is 0.07 per cent per annum, whereas for the ESG Vanguard ETF would charge me double that. And it is a similar story for the other funds in my portfolio.
Let’s be honest, however. These fees are so small that the savings I make are irrelevant compared with moves in the market. US shares are up a fifth since October. By all means pay the surcharge for having an ESG label if it makes you feel better — but you have the same fund as me.
A final couple of words on the main news items of the week, as many of you have emailed me to ask about surging UK bond yields and sterling, as well as the weaker US inflation numbers and pause in Federal Reserve tightening.
On rates I refer you again to my column on why they don’t matter — ignore anyone telling you they do. Indeed my UK equity fund has done well during these past few weeks, just as gilt yields have soared, and inflation fears reignite.
Over the pond the macro situation is reversed: inflation numbers have come in much lower than expected and policymakers reckon they’re over the worst. But my US stocks have also chugged higher in June.
Most people would find this inconsistency odd. But not if you understand why interest rates do not affect company valuations. It’s the killer AI-powered robots you need to worry about. They really annihilate your cash flows.
Letter in response to this article:
Will AI run out of control is the wrong question / From Natalie Bennett, Green Peer, House of Lords, London SW1, UK