2022 First Quarter Commentary

There’s a difference between active, responsible investing and passive, ESG (Environmental, Social and Governance) investing.  This quarter, we’re taking over the featured investing spot by sharing an aspect of what we do, and what we don’t do.  

ESG investing applies non-financial factors, i.e., environmental, social and governance criteria, to analyze financial returns, opportunities and risks.  When passively managed, ESG funds reflect a broad portfolio of holdings representing a benchmark index.  For stock funds, this might mean holding shares in hundreds or even thousands of individual companies.  It’s a matching exercise.  Whatever the index says, that’s what the passive fund owns.

On the eve of Russia’s invasion of Ukraine, ESG funds held an estimated $8 billion of Russian investments, mostly in the form of the oil companies Gazprom, Lukoil and Rosneft, as well as the financial conglomerate Sberbank and the nickel miner Norilsk.

Since the war began, passive fund giants such as Vanguard and Blackrock have sold their Russian stocks, realizing huge losses in ESG and non-ESG funds alike.

Passively invested funds, also known as index funds, have grown to $11 trillion in value, 1/4 of the American stock market.  For those who manage a passive fund, whatever is in the benchmark index must be bought.  What drops out must be sold.

The decision made by index providers MSCI and FTSE Russell to deem Russian stocks uninvestable meant cutting them from their ESG indices, thus passive funds sold their Russian holdings.  At Pennyfarthing, in contrast, we’ve never held a Russian stock, neither via direct ownership nor by recommending a fund.