The Ethical Investor: Are short sellers circling on ‘green stocks’, and eInvest’s Tamas Calderwood on how he picks ESG stocks
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The Ethical Investor is Stockhead’s weekly look at ESG moves on the ASX. This week’s special guest is Tamas Calderwood, investment specialist at eInvest.
Global stock markets have gone into correction territory this week on fears that runaway inflation could bring forward central banks’ rate hikes.
Although Fed chair Jerome Powell’s statement on Wednesday brought certainty as to the timing of the first rate hike (which he said will be in March), questions still remain over how much and how fast subseqent hikes will be.
The hawkish sentiment has caused volatilty in the market, and attracted a host of short sellers circling on stocks with overly high multiples.
We’re also starting to ominously see an increasing number of hedge funds wagering short bets on so called ‘green stocks’.
According to a report from the Financial Times this week, hedge funds have been cranking up their bets against against sustainable energy and green stocks – betting that as interest rates rise, ESG investors will not be as forgiving on valuation as they have been in the past.
The FT report says that ethically minded investors have been pumping billions into green stocks over the years, pushing their valuation multiples blindly into eye popping levels.
But a central bank induced slowdown could recalibrate a lot of these valuations, especially for early stage tech stocks or those ESG-themed stocks with no revenue.
Tesla, one of the most heavily shorted ‘green stocks’ in the world, is down 30% so far in 2022, giving a $2.3bn mark-to-market windfall to the short sellers, according to CNBC.
Betting against companies with environmental stories that are stronger than their earnings, or those who’ve been greenwashing their credentials, has become increasingly attractive for the short seller.
“In a bear market, a company doesn’t trade at 60 times earnings just because it does something morally good,” Barry Norris, chief investment officer at Argonaut Capital told FT.
“People will be a bit more hard-nosed about it when rates rise.”
On the ASX, these are the top 10 most shorted stocks according to data from ASIC (all figures are at 21 January 2022).
This week’s guest is Tamas Calderwood, investment specialist at eInvest, a managed fund run by Perennial Partners.
ESG investing is nuanced and ever evolving, so how do professional portfolio managers approach selecting exactly what to invest in?
Perennial runs an active ETF, the eInvest Better Future Fund (ASX:IMPQ).
How do you approach investment decisions for IMPQ fund?
“For us and our parent firm Perennial Partners, it’s really a comprehensive approach to ESG.”
“First, we use a proprietary scoring system established and run in-house. Each company is given a score across the E, S and G factors, as well as a score for company engagement. Each of our portfolios must have an ESG score above the weighted average benchmark score.”
“Next, we employ stewardship. As responsible stewards of capital, we use our voting discretion in the clients’ best interest by engaging with companies to discuss ESG issues, risk and opportunities.”
“Exclusions and negative screens are also employed and certain industries are screened out. A tobacco company, for example, simply will not be in any eInvest Active ETF portfolios.”
“Finally, portfolio management allows us to use ESG in portfolio construction. Stocks with ESG related concerns are either unlikely to be held or will have a lower weight in the portfolio relative to other stocks.”
But why does the process matter?
“By adhering to this process we have achieved cracking returns to our investors.”
“eInvest’s flagship ESG fund – the Better Future Fund – IMPQ – applies our ESG integration to the Australian small and mid-caps sector to construct a portfolio that not only has a positive impact on Australia’s corporate sector, but also delivers strong performance to investors.”
So if an investor was looking for an ESG ETF, is the ESG process used in selecting the holdings the secret sauce?
“While the number of ‘ESG’ labelled funds has exploded in recent years, our comprehensive and in-house developed approach ensures that ESG integration is more than just a label with our funds, it is fundamental to the way we approach investing for our clients”
“Furthermore, even our funds that aren’t explicitly ESG focused still use our ESG process in portfolio construction. All of our funds – Australian equities, fixed income or hybrids – are constructed using our ESG process and screens.”
The world’s fourth largest iron ore producer has been hit with an ESG score of 66 out of 100 by American credit rating agency S&P Global Ratings this week.
It reflects a score one below the 67-point average of more than 100 entities rated across 22 sectors globally.
As Stockheader Josh Chiat previously reported, many investors and analysts have criticised the company’s green energy initiatives due to the vagueness in the sheer number of announcements which have been churned out since the start of last year.
Aura has completed the first stage of its Net Zero Emission Study, which confirmed the Tiris Uranium Project in Mauritania as low emissions, with a clearly defined pathway to net zero.
Aura is now progessing on its pathway to net zero through the potential use of renewable energy to meet the majority of its power needs.
Vulcan Energy Italy has been granted a new research permit in Italy named ‘Cesano’, 20km north-northwest of Rome, which holds the potential for sustainable lithium battery chemical development given the recorded high heat and lithium grades within the brine, and encouraging flow rates.
If successful, the Cesano Project could provide a source of strategic, sustainable lithium in Italy for Europe’s battery and automotive market and become a possible future additive to Vulcan’s Zero Carbon Lithium business.
At Stockhead we tell it like it is. While Aura Energy is a Stockhead advertiser, it did not sponsor this article.