Ottawa is in competition with the American Inflation Reduction Act (IRA) and is thus providing subsidies of historic proportions, such as incentivizing companies to build batteries for electric vehicles. At the heart of the issue is the transition to green energy and adherence to environment, social, and governance (ESG) factors, which are leading to adverse outcomes and distortions in the economy, analysts say.
“What’s the distortion that this causes for the rest of the economy? Taxes have to go up. There’s less money to be spent on other priorities like health care. So we’re definitely going to pay for this,” William McNally, Wilfrid Laurier University professor and financial economist, told The Epoch Times on July 26.
Mr. McNally says such government spending are “almost always boondoggles”—comparing the multi-billion-dollar VW and Stellantis subsidies to bailouts for Bombardier, automakers during the financial crisis, and some of Canada’s shipbuilding and ferry-building projects.
He notes that putting all the eggs in one basket impairs the ability to invest in better technologies should they be discovered. Instead, Mr. McNally called for broad-based tax relief at the corporate level across Canada.
Terrence Keeley, chairman and CEO of 1PointSix LLC, in an interview with Mauldin Economics on July 14, said the way the U.S. IRA is doling out money is “going to ruin returns” and “disrupt the natural risk-reward of capital.”
“When governments start to try to identify winners and losers, we all end up poorer. Government agents are no more prescient than private investors. In fact, they’re less prescient than a business guy who’s on the front line that sees various things going on,” he said.
Mr. Keeley suggests just letting the markets do their work.
Mandy Gunasekara, director of the Center for Energy and Conservation within the U.S.-based Independent Women’s Forum, gave testimony on June 3 in Washington, D.C., on the “cascading impacts of ESG compliance.”
“While branded as an investment strategy for ‘good,’ ESG manipulates markets, as well as access to markets, in order to advance a leftist political agenda,” she said.
The ESG movement is pushing for divestment from traditional oil and gas firms while demand for fossil fuels is projected to rise for many years to come.
Investing in ESG Funds
Globally, “sustainable” funds stand at around US$2.834 trillion, with 84 percent of them being in Europe, according to Morningstar Direct data as of June 30. Canada only accounts for 1 percent of sustainable funds in the world.
For Morningstar, a fund is deemed “sustainable” based on the fund’s intention, not the fund’s holdings. The firm relies on the fund names and information found in fund documents, where ESG concerns should figure prominently.
Money invested in Canadian sustainable funds stood at US$34 billion across 316 funds in the second quarter of 2023, based on Morningstar Direct data.
Canadian sustainable funds mostly invest in international stocks, but the ones that focus on Canadian stocks tend to look a lot like the Toronto Stock Exchange (TSX) Composite Index, with top holdings including RBC, TD, and Shopify.
Mr. McNally says that there aren’t enough “green” companies to build a well-diversified portfolio that will perform as well as a major index, and that fund managers don’t want to be seen routinely underperforming their benchmarks.
“So what they tend to do is they hold the same stocks, but just with slightly different portfolio weights,” he said.
“So it’s kind of a game, like it’s kind of greenwashing. … It’s all a marketing game.”
Also ESG funds tend to have much higher management fees than a benchmark index fund.
The XIC TSX index fund has a management expense ratio (MER) of 0.06 percent, whereas National Bank’s Sustainable Canadian Equity ETF—by far the largest Canada-focused sustainable equity ETF, with a size of $1.7 billion—has an MER of 0.69 percent. A couple of smaller iShares ESG ETFs, XCSR and XESG, have MERs of 0.17 percent and 0.16 percent respectively.
According to data from Morningstar Direct, ESG equity indexes are performing roughly on par with their non-ESG screening counterparts, prior to deducting fees.
Not Value Investing
Mr. Keeley spoke about Warren Buffett, the billionaire value investor who is often regarded as the greatest investor of all time.
“Warren Buffett is mortal. He has practised value investing his whole life. Value investing is about as far away from ESG investing as you can find,” Mr. Keeley said.
He pointed to how ESG investing in the United States has been loading up on tech stocks and that one stock, Nvidia, is responsible for the outperformance of most of Morningstar’s ESG funds.
Mr. Keeley says ESG is not a way to generate alpha—risk-adjusted returns above a benchmark.
Investments continue to flow into sustainable funds, but the flows are nowhere near as big as they were in 2021. Morningstar attributes this to high inflation, rising interest rates, and uncertainty about the pace of the global economy.
“People have been sold this idea that they can invest for their retirement and sort of save the planet, and solve all social problems all in one step. And that’s just ridiculous, right?” Mr. McNally said.
