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Anti ESG

"ESG" orphans bets on mean reversion
ETF newcomer Constrained Capital has launched an ETF that targets stocks that are usually binned by ESG funds.
 
The Constrained Capital ESG Orphans ETF (ORFN) is self-indexed. It tracks the ESG Orphans index, which is built by Constrained Capital and calculated by Solactive.
 
The index uses FactSet's RBICS system to pick six sectors it believes are most heavily excluded by ESG funds. These are: fossil fuels, nuclear power, tobacco, weapons, alcohol and gambling. Any US listed company is eligible.

The fund then picks the largest companies in each RBICS sector, subject to caps of 12 stocks for each sector and 10% index weight for each stock.
 
Tidal ETF Services provides white labelling to Constrained Capital.
 
The fund charges 0.75%.
 
Bernie's commentary - the market has to respond
I remember during the 2015 British General Election campaign Ed Miliband, the Labour Party leader, spoke with Russell Brand, the actor. Brand asked Miliband why any leftist should vote for him, given how similar Labour was to the Tories. Miliband replied: "because politics has to respond".
 
What Miliband meant by this was that if you're a leftwinger, like Russell Brand, and you want to change the world, you cannot do it without politics. You can win every argument and identify every injustice. But if politics doesn't respond you're going nowhere. That Miliband was more likely to respond to Brand's political demands than David Cameron, then-leader of the Tories, was left unsaid. 
 
What's this got to do with ESG orphans? The dynamic of the stock market is similar to politics. A lot of people buying ESG orphans correctly believe they have been oversold. Correctly believe ESG orphans are being unfairly ostracised. (Is nuclear energy really that bad?) Correctly believe their fundamentals demand better prices. The facts are on their side. 
 
But at the end of the day, if you want a company's share price to rise, the market has to respond. Fundamentals can continue improving while share prices continue cratering. Look at what happened to Amazon from 1999 - 2002. Improving fundamentals is not a sufficient condition for share price growth for publicly traded companies. Market perceptions matter just as much, if not more.   
 
This all matters for ESG orphans because they are currently being removed from institutional investors' portfolios. Pension funds, worried about public perceptions, are adopting ESG mandates in record numbers. Meaning the market for these ESG orphans is in structural decline. In other words, what Ed Miliband told Russell Brand may be relevant here. Constrained Capital can be right about facts, but as ESG mandates grow investors simply may not care or respond.  
 

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Bernie Thurston

Bernie Thurston is the founder and CEO of Ultumus, a leading provider of ETF and index data, calculation, and workflow solutions. With over 20 years of experience in financial technology, Bernie has been at the forefront of index and ETF innovation since 2003.

His finance career began at Markit, where as Managing Director for Equities he designed and developed products for index and ETF composition and dividend forecasting from 2003 to 2011. He then founded and led DeltaOne Solutions as Managing Director, building it into a global provider of index and ETF trading data and technology services. The company managed over 100,000 multi-asset class products before being acquired by Markit in 2015.

Following the acquisition, while working for an ETF issuer, Bernie identified fundamental issues in how index and ETF data was represented across the industry. This led him to found Ultumus in 2016, building solutions for ETF primary market operations. Under his leadership, Ultumus has grown into a market leader serving major financial institutions globally, with its ETF Order Management System (OMS) supporting create and redeem workflows worldwide and its PCF platform calculating and distributing portfolio composition files for ETF issuers across every major market.

Bernie sold Ultumus to SIX Group in 2021, where it continues to expand across Europe, North America, and Asia-Pacific. Known for building lasting teams and leveraging cutting-edge technology, Bernie is focused on establishing Ultumus as the backbone of the global index and ETF industry through standardisation and automation.

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