The Ethical Investor: Why ESG funds invest in FAANG stocks, and expert views from Jaaims' Tui Eruera

The Ethical Investor is Stockhead’s weekly look at ESG moves on the ASX. This week’s special guest is Tui Eruera, the founder of AI-based investing platform, Jaaims.

The US and China surprised the world this week by announcing a joint declaration on a ‘Climate Cooperation Pledge’ at the closing days of the COP26 summit in Glasgow.

The joint statement brings together two of the world’s biggest greenhouse gas polluters in a rare show of cooperation, at a time of great political tension.

Both countries have pledged to work together to rein in climate-damaging pollutions, including plans to reduce methane emissions and cooperation in renewable energy policies.

The U.S.-China Joint Glasgow Declaration is a step in the right direction, a mark of progress, and a solid foundation for continued cooperation on climate between our two countries. The world can only achieve its climate goals if our countries are pulling in the same direction.

— Special Presidential Envoy John Kerry (@ClimateEnvoy) November 10, 2021

Meanwhile, US stock markets reached new heights over the past two weeks, touching all time highs.

The tech-heavy Nasdaq has been hovering at record levels, and that’s been partly fuelled by the increasing number of ESG funds that pour money into so-called FAANG stocks.

FAANG comprises Facebook, Apple, Amazon, Netflix and Google – which combined make up a third of the Nasdaq 100 index.

But why are tech stocks so appealing for ESG fund managers?

According to Refinitiv’s Robert Jenkins, the answer is simple: “These companies tend to not be known as carbon emitters, and therefore seem like safe bets to front up an ESG portfolio.”

It does seem these giant techs have lofty sustainable goals.

Facebook, for example, announced earlier this year its goal of reaching net-zero across its supply chain by 2030.

Amazon has ordered over 100,000 fully-electric delivery vehicles from Rivian, with further plans to invest $100 million in reforestation projects around the world on the way to zero carbon by 2040.

But some asset managers are sceptical, citing immediate pressing issues that need to be addressed first.

Issues such as Apple’s lack of transparency on forced labour, or the persistent allegations against Amazon’s workplace safety.

And then there’s Facebook, which has been constantly fighting negative perceptions since the Cambridge Analytica data scandal in 2015.

ESG funds FAANG — **Source: Refinitiv.**

ESG interview with Tui Eruera, founder of AI-based investing platform Jaaims

Jaaims is an automated online trading application that uses artificial intelligence tech to analyse, predict and make calculated stock trades on your behalf.

What do you see as the main outcome for ESG investors from the COP26 summit?

“The fact that ESG factors are driving investment decisions is nothing new, but what is rapidly changing is that ESG is no longer an afterthought, or a hygiene check before investing.

“Indeed, the reverse is true – companies that underperform in ESG won’t even make it past first base with investors.

“COP26 will expedite this as investors seek to hold companies accountable, especially as our own Government is perceived as slow to this on our behalf.

“Rather than simply looking for opportunities to invest in companies that are directly solving ESG problem, investors are also looking more closely about what companies are doing to transition their business.

“This is paving the way for AI solutions so investors don’t need to wade through greenwash and subjectively evaluate opportunities against the principles of responsible investment. For a trading platform like Jaaims, AI is essential because the markets move quickly.”

Do you see a market bubble forming around ESG investing at the moment?

“We don’t see ESG investing as a bubble as there is no ESG sector per se.

“ESG factors are key part of the operations of every single company on the planet, and pressure on these companies to improve will not abate.

“Investors are not just looking at companies that solve ESG problems through technology, they are also seeing opportunities to invest in companies across all sectors … that are making strides to improve their ESG impact.

“Meeting ESG standards is now table stakes, and technology is allowing investors to build this into decision making at the outset.

“We now have the ability to fully automate trading based on ESG criteria, which meets the demands of traders who care about the impact of their investments, but need to be able to trade quickly to take advantage of the speed of the markets.”

Closer to home, what’s your take on PM Morrison’s latest EV strategy?

“From an investor perspective this is an exciting area. More government investment in infrastructure will accelerate take-up of EVs.

“For investors it’s not just a matter of piling into Tesla stocks. Investors are also looking at what the large incumbent car manufacturers are doing to retain market share, as well as supporting infrastructure like charging stations and lithium batteries.

“The US is where investors are getting direct exposure to EV stocks, whereas in Australia exposure is more indirect through mining companies, for example, that are producing battery components.”

To that end, what are some of the ASX stocks that you recommend for ESG-minded investors?

“Within the Jaaims app, some of the well credentialed ESG buying opportunities are Altium Ltd (ASX:ALU), Appen Ltd (ASX:APX) and Charter Hall Group (ASX:CHC).

“This is based on our AI algorithm that use over 250 news feeds and over 10 million pieces daily indicating that they are vigilant about their ESG requirements, and appear undervalued compared to their peers at the moment.”

What’s happening in Australia

It’s better late than never when it comes to EVs.

The Morrison Government has finally unveiled the long-awaited Future Fuels and Vehicles Strategy this week, backed by additional funds of $178m which brings total public investment into the EV industry to $250m.

PM Morrison said the new strategy will accelerate the deployment of charging and hydrogen refuelling stations to support the 1.7 million EVs expected nationwide over the next few years.

Currently, only 1% (less than 10,000) of all vehicles being sold in Australia are electric or hybrid.

“Voluntary adoption of electric vehicles is the right pathway for reducing transport emissions over the long term,” the PM said.

“Like we saw with our world-leading rooftop solar uptake, we know that when new technologies reach price parity, Australians rapidly adopt them.”

But critics have already come to the fore saying the proposed plan ignores the most important and effective measures to improve electric vehicle uptake – such as subsidies, tax incentives, or sales targets.

Notable ASX ESG-related news during the week

Australian Vanadium (ASX:AVL)

The company has partnered with giant miner IGO Ltd (ASX:IGO) to trial a new renewable energy system at IGO’s Nova Nickel Project in WA.

IGO is set to trial the vanadium redox flow battery (VFRB) system to power its operations with 100% renewable energy.

Vanadium will supply the system free of charge for 12 months, after which IGO could either buy or rent the system.

Tlou Energy (ASX:TOU)

The company has secured a 10MW power purchase agreement with Botswana Power Corporation.

The prototype hydrogen production unit is being designed, built and tested in Brisbane prior to transportation to Lesedi in H1 of 2022, when production trials will commence.

Fortescue Metals (ASX:FMG)

Fortescue has launched its Sustainability Financing Framework, enabling the future issuance of green and social debt bonds.

FMG CEO, Elizabeth Gaines, said: “As societal expectations change, sustainability has never been more important to our investors, stakeholders, and employees.”