Nvidia more popular than Tesla as another 100 ESG funds pile in

NVIDIA’s stratospheric ascent has lured at least 100 more ESG funds in recent weeks, transforming the company into one of the most popular stocks among asset managers who integrate environmental, social and governance (ESG) metrics into their investment strategies.

There are now over 1,400 ESG funds directly holding Nvidia, according to data compiled by Bloomberg based on the latest filings. A further 500 are indirectly exposed, the data show. Nvidia shares hit a record high on Tuesday (Jun 20), bringing gains this year to about 200 per cent.

The company is now more popular among ESG investors than traditional green powerhouses such as Vestas Wind Systems and Tesla, according to the Bloomberg data. The funds analysed are registered as either “promoting” ESG, making it their “objective” or simply marketing themselves as ESG.

Nvidia has become an “ESG darling”, said Felix Boudreault, managing partner at Montreal-based Sustainable Market Strategies. And that’s “not ludicrous”, because the company is “exemplary” when it comes to traditional ESG risk management, he said.

Daniel Klier, chief executive officer of sustainability data and technology firm ESG Book, calls Nvidia “one of the best-performing companies in the large-cap universe”, thanks to a high level of ESG disclosures and a business that’s aligned with the critical global warming threshold of 1.5C.

ESG’s growing exposure to tech – and in particular artificial intelligence (AI) – has the potential to change the narrative around an investment strategy that last year suffered a number of headwinds. Amid an energy crisis and rising interest rates, ESG found itself the target of political attacks in the US, with Republicans calling it an anti-American form of business and investing that put a “woke” agenda ahead of financial returns.

This year, however, ESG funds’ reliance on tech is driving outperformance. The top ESG funds so far in 2023 are all tech-heavy and invested in AI, and all have returned more than 40 per cent. In Europe, ESG equity funds have delivered about 12 per cent this year on average, compared with gains of roughly 8 per cent in the Stoxx Europe 600 Index.

Among ESG-registered funds with the biggest returns so far in 2023 is one managed by T Rowe Price Group, which is up about 46 per cent. Nvidia is its fourth-largest holding, according to Bloomberg data. The fund, whose top three stocks are Apple, Taiwan Semiconductor Manufacturing and Microsoft, has beaten 97 per cent of peers since the end of December.

An ESG fund run by the asset management unit of JPMorgan Chase & Co is also up 46 per cent, according to Bloomberg data. Its biggest holdings are Facebook parent Meta Platforms and Nvidia.

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The Nasdaq 100 Stock Index, whose top three stocks by weightings are Microsoft, Apple and Nvidia, has soared almost 40 per cent this year.

As investors pile into AI, Europe and the US are figuring out how best to rein it in with regulations amid warnings from some of the scientists behind the technology that it may pose a serious threat to society without adequate guardrails.

But Boudreault says that if done right – and with the right regulatory boundaries in place – the “AI revolution” could actually have “massive positive impacts to address the world’s most pressing challenges, be they social or environmental”.

Meanwhile, the mania surrounding AI-related stocks is starting to look overdone to some. Cathie Wood, founder and CEO of Ark Investment Management, said earlier this year she had decided to drop Nvidia as the company faces growing competition. Wood is instead looking “to another set of plays”, she said.

James Penny, the chief investment officer of TAM Asset Management and a veteran investor who correctly predicted the headwinds facing ESG last year, said earlier this month that the current mood around AI is reminiscent of the early days of the tech bubble that burst in 2000 and wiped more than 70 per cent off the Nasdaq.

“I think the market has got a little bit over its skis,” he said in comments first published on Jun 12. “I’d put much larger odds on it coming down from here.”

If such predictions hold, even companies with robust revenue and earnings models stand to get caught in the fray. The dot-com bubble wiped about 60 per cent off Microsoft’s market value. Since then, however, it’s added roughly 1,500 per cent.

Chasing a market frenzy “is never a good strategy”, said Boudreault. But if the question is whether it makes sense to hold Nvidia from an ESG point of view, then the answer is “increasingly, yes”, he said. BLOOMBERG