Tech is low, but far from ESG funds.

It probably hasn’t escaped your notice that tech stocks haven’t had a good year. They fell sharply, along with other growth companies hit by rising interest rates. Since January, the MSCI ACWI Information Technology Index has lost 45 percent of its value.

But what you may not realize if you’re a sustainable investor is that your mutual funds may be exposed to technology stocks. US-based residential equity funds classified as Environmental, Social, Governance (ESG) have an average holding of 29 percent in technology. This compares to just 23 percent for equity funds in general, according to analysis by ESG specialist Elisabeth Stein.

Among the biggest U.S. tech stocks, Facebook owner Meta is down 56 percent this year, Google owner Alphabet is down 28 percent, Amazon has lost 25 percent and Apple is down “only” 15 percent. It’s not beautiful.

Investing may not be top of mind for many sustainable investors when choosing an ESG fund. Problems range from supply chain transparency issues (Apple) to overuse of packaging (Amazon) to privacy and misinformation (Meta).

Take the mammoth $22bn iShares ESG Aware MSCI USA ETF. Its top holdings are Apple, Microsoft, Amazon, Tesla and Alphabet. One reason for this is that ESG funds are often simply excluded. They agreed not to invest in certain things – the old school to get rid of arms groups and tobacco, but for the 21st century reforms extended to oil and gas companies.

Remove all of these factors and other areas are likely to be overrepresented, particularly in the US where tech stocks are a big part of the index.

The iShares fund is a good example of how rating agencies differ on whether a company is sustainable. In addition to screening specific sectors, the iShares ETF said it was “leaning” toward U.S. companies with favorable ESG ratings. Sustanalytics, a sustainability rating agency owned by research house Morningstar, assigns Amazon a “high risk” ESG risk rating, ranking it 450 out of 457 companies in the retail industry group – 1 being the lowest risk. But MSCI, which the iShares fund uses, averages Amazon’s ESG score.

A good example is how an ESG score can tell you what kind of companies a fund is likely to invest in. You need to check out the top 10 properties to keep you comfortable all the time.

The good news is that ESG funds outside the US tend not to be particularly overweight technology stocks. Lipper Global Analysis, a global growth ESG fund for UK retail investors, found that only slightly overweight technologies – at 20 per cent compared to an average of 19 per cent.

But even if a fund is heavy on tech, it’s still worth digging in to see what kind of tech companies it holds. Take Liontrust Sustainable Future Global Growth, a UK-domiciled fund. It has 36 percent holdings in technology companies and 22 percent of the index – MSCI World.

But fund manager Simon Clements said among the tech giants, LeonTrust is the only one of Google’s parent Alphabet – and most others – that hasn’t included their ESG analysis.

Amazon was rejected because Liontrust didn’t think it did enough to recycle cardboard and had issues with employee management, while Apple’s supply chain transparency problems left them with no other option. Google, on the other hand, treats its employees wonderfully. (It’s another matter for investors that different ESG funds can take opposing views on the same stock.)

But most of the fund’s technology holdings are in technology applications that make companies more efficient, Clement says.

One of these companies is Autodesk, a software company that aims to digitize the construction and manufacturing sectors. It helps reduce errors and costs when designing new buildings: a technique the construction industry is embracing. “We’re looking for technology stocks where the technology hasn’t caught up yet,” Clements explains – which makes sense coming from a growth fund manager.

Another company that falls under Liontrust’s technology banner is Infineon, a German semiconductor maker with customers ranging from electric vehicles to wind turbine manufacturers.

But even these tech stocks have fallen with the sector this year, despite being clearly aligned with sustainable investing. Autodesk fell 24 percent, while Infineon fell 40 percent.

Indeed, some see this as a buying opportunity. Felix Boudreaut, managing partner at Sustainable Market Strategies, said of more sustainable tech companies: “I think some of these companies will probably come back faster than Facebook or other technologies that have no role in the future economy. Sometimes it is an opportunity to buy when you think they have a better and bigger role in the future.

Those looking to truly avoid technology can choose from a variety of ESG funds. Tech companies aren’t famous for dividends, so equity income funds may be underweight in this sector, according to Lipper’s data. Or, investors can move beyond broad global equity funds and focus on specialist sectors.

Boudreault suggests looking at hedge funds that are outperforming the broader market, relative strength in commodities, and ESG-aligned. The iShares Global Timber and Forestry Ucits ETF has lost less than 5 percent this year and is up more than 4 percent over the past 12 months.

Thematic investing is recommended by Stein to avoid overweighting unnecessary sectors. She calculated that US funds, which are less likely to acquire high-tech holdings, are biased toward one of four characteristics. They can be valuable funds; They are less likely to invest in large companies and more likely to be international.

The real reason tech stocks stand out in ESG funds — their driving performance in the years before the current downturn — is that ESG funds are often not as different from an index as many sustainable investors think.

Whether that bothers you depends on your priorities. You may want to avoid technology because you are worried about growth stocks. You might think it’s a buying opportunity. You may want to avoid technology because it is not something you think of as a sustainable stock; You might think that is perfectly acceptable. As always, there is something for everyone, but the transparency of the ESG universe means you have to do your homework.

Alice Ross is the FT’s deputy news editor. Her book “Investing to Save the Planet” is published by Penguin Business. Twitter: @aliceemross

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