Frontrun ESG's Exit From Tech, They Can't Buy Energy or Mining

The ESG movement has helped push the technology sector to extremes because it eschews investments in sectors that power the economy. Energy is 3 percent of the S&P 500 Index, technology is north of 40 percent once you account for Amazon, Google, Facebook, Netflix, Tesla, Twitter and other tech companies that were moved out of the old tech sector. Assume we move into a stagflationary economy such that energy and commodities are vastly outperforming the market, and you're an ESG manager trapped in stocks headed for 80-percent inflation-adjusted losses. If you don't believe that number, consider that Amazon's stock price fell 95 percent in the doctom bust. Microsoft fell 70 percent into the 2008 low, with no consideration of inflation.

Assume tech in general loses 60 percent nominal, that takes a $100 portfolio to $40. Stagflation would involve double-digit inflation. The current CPI, if using 1980s calculation that Volcker was working from, would be 14 percent. I'm skeptical of these calculations to a point. If inflation takes off we probably will see the CPI "break" because the market will ignore it for a new measure or the CPI will capture actual inflation and head towards double digits in a stagflationary scenario. A decade of roughly 8 percent CPI would cut the value of the currency in half, which would take a nominal $40 portfolio down to $20 in purchasing power.

Let's say you're an ESG manager right now. Your portfolio is loaded to the gills in technology. You're not allowed to buy the stocks that will lead the market higher, and even if you wanted to buy them, a lot of them are probably far below your minimum market capitalization and liquidity requirements. Large managers with no ESG mandate can go into commodity futures, but not ESG. What do they buy? Solar is the first thing that came to my mind. First Solar (FSLR) as a P/E of about 20 right now. I assume stocks like this will see multiple expansion into 50s or even 100s in an energy bubble. Some ESG managers with looser standards might be able to wade into some agricultural stocks, like technology companies that conserve resources. I can't think of a large company that qualifies today, but if all the ESG managers are looking for something to own, maybe some of these firms get extremely high valuations.

Anyway, I'm genuinely curious about this, sparked by the reality of soaring coal stock prices. For example, would ESG be able to invest in clean coal? If they support clean coal, they are in effect supporting and probably expanding coal as an energy source. Maybe that is what is coming, a return to sanity with idiotic ideas like "net zero" emissions go into the ash heap. If not, the options for ESG are highly limited in an environment where funds with no restrictions will be generating high double-digit annual retuns. ESG managers will be losing jobs left and right if Joe Value Fund returns an annualized 40 percent for 10 years, while Mr. ESG is losing an annualized 10 percent. If ESG as a concept is here to stay, that means ESG managers will still be managing trillions upon trillions in wealth and it'll have to go somewhere profitable if it is to continue existing.

In the nearer term, the obvious play is to short technology. They have to sell technology for something else if there is a bear market. Then the question is: what will they buy? If they don't won't Particularly if you think ESG managers don't know what to buy, because they're trapped. They're the bag holders for this bear market.

Drilling into the Sectors

MSCI put out a report on the 20 largest ESG funds (PDF). In the report is this sector exposure list and top holdings list.

Some of the ESG funds have flexible mandates that let them invest in clean coal, natural gas over oil, or in say the oil drillers that use low-carbon methods. These funds will be fine because they can invest in energy and mining firms. Under stagflation, financials are a bad bet, they're out. That leaves telecom, healthcare, alternative energy and maybe utilities. Battery tech and electrificaiton will also be a destination.

What has me wondering though, is how large are their target asset markets versus their current terchnology holdings? There aren't several $1 trillion market cap battery stocks. The simple solve in this equation is a bear market. Trillions upon trillions in ESG funds are going to money heaven.