What’s not to love about funds that focus on environmental and social governance criteria? They are popular, give more choice and “do good”. The hard numbers show positive momentum in fund flows.

As of October, assets under management in ESG-based exchange traded funds and products had increased by nearly 26 per cent globally to almost $22bn. That year-to-date figure compares with 2.5 per cent for ETFs and ETPs generally.

This data from research company ETFGI confirms trends seen in other research. A report by State Street Global Advisors in July showed that more than 80 per cent of institutional investors believe ESG flows will increase in the next five years.

Choice is increasing and costs declining. BlackRock iShares for instance announced a new ESG-based suite of funds in October. Crucially BlackRock priced the funds at the same level as its core range. Vanguard had released two UK-listed ESG funds a few weeks earlier.

It sounds great, doesn’t it? But what about the “doing good” bit? Here is where I begin to have second thoughts.

Talk to fund selectors at robo advisers and they wax lyrical about the millennial generation and the need for a new paradigm for fund selection. The narrative ends up hinting at progressive ideals: being seen to do the right thing to do good, by the planet, to women, to the persecuted. One only needs to add the dread words “social justice” and I think you will begin to see where a problem may emerge.

I would argue that the asset management industry is increasingly a victim of groupthink.

Even worse, I think an argument can be made that it has been captured by the liberal, educated global elite — and I speak as a card-carrying member and proponent of said elite.

This same group probably jeered at recent ETF launches that tried to focus on Making America Great Again a la US president Donald Trump, and rolled their eyes at Christian-focused funds. I certainly did.

But whenever I run into fund managers and marketing folk enthusing about saving the planet and boosting diversity my mind turns to the hi-vis mobs on the streets of France. They’re not as keen, for instance, on the preferred elitist ideas about diesel taxes. Farmers aren’t keen on vegans picketing their homes. One elite’s virtue is another’s injustice.

If the fund management industry really cared about ESG and especially the governance part, they could launch ETFs and funds that refuse to invest in a business where the chief executive is paid more than 20/50/100 times the salary of the lowest-paid employee. Or they could screen out businesses where more than 10 per cent of staff are paid below a notional living wage.

Perhaps they could screen in businesses that source supplies only from the home market, so defending localism and a nationalist agenda. Hell, while we are at it, we could even see ETFs where anti-union employers are excluded as a matter of course.

I do not agree with any of these populist agendas but my point here is that they barely feature in most ESG screens except as a minor item in the G of the scorecard, usually only invoked after some controversy. If we favour real diversity within a model using ESG and/or socially responsible investment, we need to accept that no one group has a monopoly on virtue.

Currently, ESG funds reek of elitism. Where are the resolutely leftwing ESG screens or, for that matter, rightwing nationalist screens? If asset management is going to start sounding more like identity politics with a fund, why not go the whole hog and listen to consumers and investors whose views are not in favour with the so-called liberal elite?

I would add one further charge against the boom in ESG funds. Impact. Real impact. Or lack of it.

I am currently taken by the idea behind an investment trust trying to list on the London Stock Exchange. The Global Sustainability Trust is terrifically “right on”. Its focus, though, is not on tick-box exercises, data scraping or nudging corporate practices. No, it wants to invest in private businesses with a direct, concrete impact. That may, for instance, mean funding microfinance outfits that fight financial exclusion. Here, your virtues (liberal and progressive though they may be) are being backed directly.

The problem with this impact-based approach is, of course, that it is almost impossible to operate via a fund that backs public-market vehicles, as there are so few that tick a much more rigorous approach to establishing corporate impact.

Ironically, impact investing seems largely to be the preserve of private equity folk — arguably the least virtuous bunch within the asset management spectrum.

David Stevenson is editor of etfstream.com and is the Adventurous Investor columnist for FT Money

Letter in response to this article:

Ignoring ethical factors is a dereliction of duty / From James McManus, London, UK

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