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Rising oil price could expose Achilles heel of ‘ESG’ ETFs says Tilney’s Louie French

Louie French, Manager of the Tilney Sustainable MPS comments:

“With OPEC+ unable to reach an agreement on increasing oil production, oil prices have rocketed to three-year highs. This rise could spell danger for a number of ETFs in the Environmental, Social and Governance (ESG) space.

“Over the past two or three years we have seen a proliferation of ESG ETFs come to market, and these products have only operated in a growth environment dominated by the likes of the technology sector. With rising oil prices, some of these ETFs are going to see the strength and depth of their screens severely tested.

“Oil prices rising will inevitably lead to an increase in share prices of the oil majors, and as a result, investors and advisers may find themselves looking at their ESG ETFs’ top 10 holdings and seeing names such as BP and Royal Dutch Shell featuring prominently. Is this what investors really want to see from an investment with a specific ESG mandate?

“ESG and sustainable investing requires nuance and a human touch, especially due to the outstanding issues with ESG data. There are limited exceptions, such as ETFs focusing on specific themes like water or clean energy, which can work well as part of a diversified portfolio.

“It comes down to a question of cost versus value, or in this case, values. Investors need to take into account whether paying less for an ESG ETF with poor-quality screening policies is really worth it.”

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