Should You Play the US$50 Trillion ESG Trend?

Something interesting brewed in Nestle recently.

As per a leaked company document, over 60% of its products are not healthy.

In fact, the company thinks, some of its products will never be healthy, no matter how much it innovates.

A few years ago, Nestle faced a backlash when its popular 'Maggi' faced a ban due to high lead and MSG (monosodium glutamate) content.

The stock has recovered well from the depths of that crisis.

But it will be a long time before it comes anywhere close to being a 'healthy' product company in the true sense.

This instance reminded me of a dramatic video, I once saw.

The head of a soft drink company had a tough time defending the amount of sugar in the product and its impact on health. When the host asked the company executive, he refused.

Now I have no problem with businesses that sell fast foods.

But this is what I find a bit perplexing.

Why are these companies chased after by proponents of ESG?

ESG (environmental, social and governance) is all about investing ethically. The companies are screened on the basis of how good or bad the business is for the society.

To add to the list of such anomalies is Johnson & Johnson - one of the top 10 holdings of funds claiming to invest ethically.

The mask of being 'socially good' was taken off when its baby powder was found to have asbestos - a cancer causing product.

Globally, and in India too, ESG has become the next big theme.

As per an article in Moneycontrol and data from Morningstar, in last 5 years, ESG based AUMs (assets under management) have grown from US$530 m to US$1.2 trillion.

That's a staggering CAGR (compound annual growth rate) of 368.8%.

In the post Covid world, with ample liquidity and interest in stock markets, ESG has been a big fund puller.

As per a Bloomberg article, ESG assets may hit US$53 trillion by 2025 (a third of global AUM).

The amount of money the theme has attracted it is impressive. This trend may continue.

But will it deliver returns?

To be sure, I don't put in an ESG constraint in my stock picking process.

There are instances when we have recommended cigarette making companies, so called 'sin' stocks, which delivered good returns along with dividends.

It's up to individual readers and subscribers to include it or ignore such stocks in their portfolio. That depends on one's belief system.

We do not check a company's ESG score, but we do enough diligence to ensure the business is sustainable.

We look for companies that offer products and services with sustainable demand which are run by competent and transparent managements.

It all boils down to sustainability and financial performance (profits, growth, return ratios, balance sheet strength).

Last but not the least, we seek a margin of safety in the stock's valuations.

I'm happy to own high ranking ESG companies that meet these conditions.

But that would be just a coincidence.

Starting with an ESG lens and limiting my investable universe is not something I will do.

I've said this before, there is not enough transparency and clarity separating the good from the bad.

A recent case in point is the controversy between Amul and PETA (People for Ethical Treatment of Animals).

A war of words has ensued in response to PETA's comment that Amul should switch to vegan products.

You see, dairy industry globally is notorious for ill-treatment and exploitation of animals. So you may be tempted to take a stand between the livelihood of farmers or a moral angle towards avoiding animal products.

But that would be quite subjective.

Amul is not a listed firm but if it were, I suspect it would be a bit challenging to put an ESG score on it.

I would rather focus on sustainability of the business and the upside in the stock rather than being a moral judge.

I have nothing against so called 'good' and high scoring ESG businesses.

But the valuations at which these stocks are trading are prohibitive.

What could haunt the ESG theme in the future is its seemingly valuation agnostic approach while buying these stocks.

Investing in some of them could end up being a classic case of betting on good companies that do not always offer good returns.

Do you agree?

Let me know your views on ESG investing.

Warm regards,


Richa Agarwal
Editor and Research Analyst, Hidden Treasure

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