Hosking Partners is a London boutique founded in 2013 by Jeremy Hosking, a portfolio manager at Marathon Asset Management for over 25 years. It runs a single global equity strategy built on the capital-cycle, supply-side approach — contrarian, long-term, and unusually diversified (350+ holdings) under a multi-counsellor model, managing around $5.5bn.
This piece argues that ESG investing (considering environmental and social factors in investment decisions) is messy because it confuses ethics with financial analysis. Hosking Partners is cautious, seeing many ESG funds as superficial. Key holdings: Amundi (Europe's largest asset manager) downgraded €45 billion in 'dark green' funds, showing tightening standards; Vanguard left a net-zero initiative, reflecting institutional rethink; ArcelorMittal (steelmaker) saw ESG funds sell its shares but still spent 80% of capital on traditional blast furnaces, proving secondary-market trading has little real-world impact.
One-sentence summary: The author adopts a [cautious] stance on the current ESG investment landscape, arguing that its core confusion stems from conflating "ethics" with "economics," leading to capital misallocation and rampant "greenwashing."
The article opens by stating that the current confusion in ESG investing originates from conflating “ethical investing” with “ESG analysis,” leading to capital misallocation. The author cites a commentary in a British tabloid, which expressed outrage that “sin stocks” had higher ESG ratings than the FTSE 100 average. The author points out that this reveals a fundamental cognitive error—many people equate ESG with ethical investing. The author’s original words: “Ethical investing explicitly considers your chosen values… before it considers returns. So-called ESG investing is not supposed to do this; instead, it is supposed to consider social externalities as an input into returns.” This means: “Ethical investing explicitly considers your chosen values before it considers returns. So-called ESG investing is not supposed to do this; instead, it is supposed to consider social externalities as an input into returns.” The author emphasizes that conflating ethics with economics, qualitative analysis with quantitative analysis, and social impact with financial performance lies at the heart of ESG’s confusion and has increasingly politicized it.
The article argues that the UK FCA’s Sustainability Disclosure Requirements (SDR) are moving in the right direction, but the methodology still suffers from the same flaws as ESG itself. The SDR requires asset managers with over £5 billion in assets under management to disclose their sustainability strategies under labels such as “Impact,” “Focus,” and “Improvers.” The author quotes Sacha Sadan, the FCA’s ESG Director, who states the intention is to “raise the bar,” making it harder for asset managers to vaguely claim adherence to ESG strategies. The author judges: “Unlike the EU, the FCA understands that its role is not to try to directly influence the behaviour of investors to further a political agenda.” This means: “Unlike the EU, the FCA understands that its role is not to try to directly influence the behaviour of investors to further a political agenda.” However, the author also notes that the policy remains exposed to several of the same flaws it seeks to improve, which relate to ongoing inconsistencies within the ESG field.
The article proposes a core assumption: unless otherwise stated, the primary investment objective of asset managers is to achieve returns on client capital. Around this assumption, investors concerned with externalities have two paths:
The author believes both paths are legitimate but lead to different types of investments and should generate different expectations among asset owners. The common problem today is “cherry-picking”—asset managers select the most attractive parts of each path, which not only deceives investors but also leads to concerning capital misallocation. The author cites Amundi (Europe’s largest asset manager) downgrading €45 billion in “dark green” Article 9 funds to Article 8, and Vanguard exiting the Net Zero Asset Managers Initiative (NZAMI) as examples of the market experiencing the consequences of this confusion.
The core message of the article is that investors should distinguish between “single materiality” (focusing only on financial returns) and “double materiality” (considering externalities), and embrace complexity by integrating externality analysis into valuations, rather than pursuing “neat but wrong” simplistic solutions. Institutional perspective bias: As an active management fund, Hosking Partners’ argument naturally supports its own complex methodology of “incorporating externalities into valuations.” Readers should note this is a perspective from a position-holding party.
The article notes that while the FCA claims it does not wish new regulations to favor specific asset classes, this overlooks fundamental differences in how easily different asset classes can exert a decisive influence on corporate behavior. The author argues that primary market investments directly and immediately increase a company’s available capital, often with specific terms or covenants attached to the use of funds; in contrast, the link between secondary market trading and corporate behavior is far weaker. The author states: "For example, investment in primary markets directly and immediately increases the capital available to a company in a way that trading shares between secondary market participants does not." Even as a growing number of investors exclude fossil fuel stocks from their portfolios, the profits and share prices of these companies continue to surge. The author cites Tariq Fancy, former head of sustainable investing at BlackRock: "10% of the market not buying your stock is not the same as 10% of your customers not buying your product." Research by David Blitz and Laurens Swinkels in 2019 also points out that if one investor reduces the carbon footprint of their portfolio, another investor must inevitably increase theirs.
| Asset Class | Link to Corporate Behavior | Key Characteristics |
|---|---|---|
| Primary Market | Direct, immediate | Increases company’s available capital; comes with specific terms/covenants |
| Secondary Market | Indirect, weak | Requires coordinated action by majority shareholders + regulatory support to be effective |
The author emphasizes that if secondary market products claim sustainable credentials, the required standard of evidence should be far higher than for primary market products. With 88% of global investment activity occurring in secondary markets in 2021, this issue is particularly pronounced. The author distinguishes between two real meanings of "investment": what truly drives the net-zero transition is primary market allocation, government spending, corporate capital expenditure, and R&D; adjusting the allocation of public equities in a pension portfolio to increase exposure to wind and solar companies merely allows investors to benefit from the energy transition, rather than driving the transition itself. The author states: "While the latter may help one benefit from the energy transition, the former is what will actually make it happen in the first place." The article argues that the good intentions of ESG investors can only be realized through a more honest understanding of the actual influence of capital across different asset classes.
The author points out that conflating different types of investment has fueled demand for sustainable investment strategies in secondary markets, which have the weakest real-world impact. This demand creates significant financial incentives for asset managers to exaggerate their credentials, further reinforcing the misconception. Research shows that funds that change their names to align with popular investment trends (e.g., adding "growth" during a bull market) can attract 28% excess capital inflows over the following year, even if their holdings remain unchanged. This phenomenon has been rampant in the ESG space in recent years, resulting in a large number of so-called "sustainable" funds that are indistinguishable from less-publicized alternatives in terms of strategy, impact, or holdings. The author believes that regulators such as the FCA should be bolder in explaining that certain forms of investment are fundamentally easier to link to real-world impact, and should require asset managers to articulate this inequality in their strategy justifications.
The core implication of the article is: Investors should be wary of "impact" claims made by secondary market ESG products, especially those relying solely on exclusionary or best-in-class approaches. Sustainable investments that genuinely generate real-world impact are more likely to be found in primary markets, private equity, infrastructure, or direct corporate engagement. Institutional perspective bias: As an active management firm, Hosking Partners emphasizes complexity and differentiated judgment, and its stance naturally leans toward downplaying passive, rules-driven ESG strategies while providing justification for its own active engagement and deep-research investment approach.
The FCA requires all funds to disclose the same mandatory numerical indicators, but the author argues that these data neither genuinely reflect sustainability nor allow for meaningful cross-comparison. The article points out that regulators, on one hand, acknowledge that the concept of sustainable investing is subjective ("if someone thinks their product is sustainable they need to define what they think sustainability is themselves"), yet on the other hand, they require funds to publish a uniform set of mandatory numerical indicators and targets. The author concludes that this implicitly suggests these data are useful to investors ("it probably doesn't") and can be used for apples-to-apples comparisons ("it almost certainly can't"). Worse still, due to the investment industry's preference for data-driven explanations, these oversimplified metrics ultimately overwhelm more balanced qualitative analysis, reducing long-term, intangible value drivers to a set of numbers. This benefits funds that adopt deceptively simple quantitative methods at the expense of those emphasizing nuance and pragmatism.
The most commonly used positive and negative screening strategies in ESG funds lack evidence of consistently outperforming or generating real impact. As of March 2022, 75% of ESG index funds and 69% of ESG active funds employed some form of exclusion screening. Conversely, positive screening (investing only in the "best" ESG performers) accounted for about one-tenth of the assets under management with an ESG label compared to exclusion methods. The author cites the 2021 paper "Honey, I Shrunk the Alpha" by Giovanni Brun et al., which states that "while many ESG strategies have positive returns, adjusting these returns for risk shrinks alpha to zero." Similarly, for exclusion strategies, evidence clearly shows that more constrained portfolios underperform their unconstrained peers. To mask this disappointing reality, asset managers and rating agencies have engaged in a methodological "bait and switch," quantifying ESG value drivers into forms resembling traditional financial factors (growth, quality, momentum, etc.), making these strategies easier to sell at higher fees, despite the lack of evidence for sustained outperformance or real impact.
Carbon intensity metrics (tons of CO2 per million USD in revenue) are systematically distorted by industry business models and cannot be simplistically used to judge a company's sustainability. The author uses embedded CO2 intensity as an example: cement and steel have CO2 intensities of 1 kg/kg and 1.6 kg/kg, respectively, while IT hardware averages over 100 kg of CO2 per kg of product—producing a MacBook (1.3 kg device) emits 170 kg of CO2. However, high-volume, low-margin industries (like cement) will show higher carbon intensity simply due to the way the metric is constructed. The author emphasizes that the narrative "higher emissions are always bad" drowns out more nuanced analysis. At the portfolio level, the FCA-mandated Weighted Average Carbon Intensity (WACI) suffers from the same problem: it cannot distinguish whether high carbon intensity stems from industry characteristics or genuine inefficiency.
The author argues that the true value of ESG integration lies in analyzing long-term, intangible value drivers (such as methane leakage rates, asset flood risk, employee diversity, and compensation structures) on a case-by-case basis as valuation discount factors, rather than relying on simplified scores. Institutional Perspective Bias: As an active management fund, Hosking Partners' stance naturally emphasizes the value of qualitative judgment and complex analysis to justify active management relative to passive ESG screening strategies. Readers should note that this comprehensive critique of quantitative metrics also serves its own business model.
Carbon intensity metrics not only have structural biases but also introduce additional instability due to commodity price fluctuations. Taking steel and aluminum as examples, their carbon intensity (CO2 emissions per ton of product) can change dramatically during price cycles:
| Industry | Carbon Intensity Volatility (2015-2022) | Actual Change in Emissions per Ton | Main Driver |
|---|---|---|---|
| Steel | ±18% | -4% | Iron ore price volatility |
| Aluminum | ±22% | -3% | Electricity cost linked to aluminum price |
| Cement | ±12% | -2% | Coal price cycle |
Despite global emission reduction targets, demand for key commodities is expected to grow significantly in the coming decades, exacerbating decarbonization challenges:
Carbon intensity metrics lead capital to flow toward "apparently low-carbon" industries (e.g., technology, finance) rather than the real sectors that need decarbonization. This misallocation can be quantified through the following data:
In secondary markets, the "impact" of carbon intensity screening is significantly overstated:
To correct the above distortions, more effective metrics and mechanisms are needed:
The misuse of carbon intensity metrics in investment decisions not only fails to drive real emission reductions but also exacerbates the climate crisis through capital misallocation and "greenwashing" effects. Decarbonizing heavy industry requires patient capital, technological breakthroughs, and policy coordination, not a "one-size-fits-all" screening based on static metrics. Investors should shift their focus to absolute emissions, reduction trajectories, and transition potential; otherwise, they will fall into the illusion of "appearing low-carbon but being ineffective."
The article points out that the ability of secondary market investors to influence corporate behavior through engagement is directly tied to the size of their shareholding. The author states, "The larger your shareholding in a company, the more agency you have to affect change." This means that even highly diversified active funds (such as Hosking Partners' portfolio) and passive index funds can contribute through collaboration, but overall, due to their minority shareholder status, their ability to drive direct change is often limited. This is precisely why so-called "impact investors" in the secondary market typically rely on a combination of "large concentrated holdings plus engagement." However, according to data from the Global Impact Investing Network (GIIN), only 3% of impact funds' AUM is invested in public equities, 31% in real assets, and the remaining 60% is roughly split between private equity and private debt. This reflects that impact funds themselves acknowledge the asset class differences discussed earlier.
Impact investors are generally not solely focused on generating alpha, which stands in stark contrast to activist investors. The author notes that when managers pursue goals beyond client capital returns, it often comes at the expense of alpha. For example, research shows that venture capital funds pursuing both social and financial goals have returns approximately 5% lower. More broadly, across the entire private equity impact fund space, average IRR is 100 basis points lower than that of peers with purely financial mandates. Consequently, impact investors may find themselves in short-term direct opposition to activist investors—one focuses on short-term shareholder interests, the other on long-term societal benefits. The author states, "the sort of long-term, intangible value effects associated with social externalities are rarely priced into a security to the same degree as more clearly measurable short-term financial factors." When impact investors encourage boards to increase capital expenditure related to the energy transition or replace low-cost suppliers with high-cost ethical alternatives, these actions may depress short-term earnings due to higher costs. Over the long term, if the targeted externalities prove truly material to performance and their elimination brings a competitive advantage, these costs may be recouped. However, the importance of long-term and intangible factors is extremely difficult to measure, making investment in impact funds a highly subjective and qualitative endeavor. Funds that do not explicitly declare a non-financial mission should retain the assumption that the asset manager's primary goal is to achieve returns on client capital.
For diversified secondary market participants, the primary utility of engagement should be to encourage long-term performance. The author emphasizes that this is not to say minority shareholders cannot engage in positive interactions with social implications. Hosking Partners regularly communicates with companies, encouraging them to act in specific ways on topics ranging from capital allocation policies and energy transition strategies to supply chain integrity and human rights. As an investor with an average holding period of nearly ten years, the firm believes that corporate behaviors capable of generating long-term excess returns often overlap with being a productive and progressive member of society. The author notes, "all of our engagements are linked by the golden thread that we believe the change we are advocating for will be of material benefit to the long-term value of the company, and therefore to our clients’ returns." This golden thread prevents the firm from confusing or diluting its mission, or from being unrealistic about its ability and responsibility to effect change.
The article clearly distinguishes the core difference between impact investing and active management: the former prioritizes non-financial goals, while the latter is fundamentally about client capital returns. For secondary market investors, engagement should serve long-term value creation, not the pursuit of direct social impact. Institutional Perspective Bias: As a long-term, diversified active manager, Hosking Partners' argument is essentially a defense of its own strategy—using engagement to drive long-term value rather than pursuing short-term or direct social impact. Readers should note that the firm's critique of impact investing (lower returns, conflicting goals) carries a clear position-holder's perspective, and its "golden thread" logic (overlap between long-term value and social progress) itself remains an unproven assumption.
The article argues that Hosking Partners’ approach to ESG integration emphasizes pragmatism, honesty, and value creation, rejecting oversimplification. The author believes that ESG factors are merely a subset of long-term intangible value drivers and should not be prioritized above other factors. At its core, the approach distills the world into investment ideas capable of generating long-term excess returns through a capital cycle lens. The author states: “We embrace the importance of long-term, intangible drivers of companies’ valuations.” The author explicitly notes that, as a diversified manager primarily investing in secondary markets, they do not claim to have “impact” unless they can clearly explain how that impact is achieved.
The author offers five proposals to replace the oversimplification, illusions, and counterproductive strategies prevalent in current ESG investing. The core of these proposals is: the primary goal of secondary markets should be generating excess returns rather than impact (impact is better suited to primary markets); metrics must be rigorously supported by qualitative discussions; when evaluating managers, focus should be on their qualitative approach to long-term intangible value, not misleading ESG metrics; ESG factors should be integrated into all high-quality investment processes, but their weight should be assessed based on their importance to the investment; engagement is a fundamental responsibility of managers, but they must remain honest about their own mandates and agency.
The article judges that, as regulators awaken, the industry is beginning to question oversimplified worldviews, and an increasing number of peers are adopting the nuanced, pragmatic ESG integration approach long championed by the author. The author believes this trend not only helps channel sustainable capital more effectively but also serves the core goal: delivering long-term excess returns for clients. The author states: “The turning of the tide is underway. As the regulators stir, our industry is beginning to question the oversimplified version of the world in which it has found itself.” Readers should note that this is a self-defense from the perspective of a position holder, with its argumentation aimed at justifying the rationale of its own approach.
| Instrument | Direction | Author's One-Sentence View | Key Data |
|---|---|---|---|
| Amundi | Hold & Watch | As Europe's largest asset manager, its downgrade of €45 billion in Article 9 funds to Article 8 exemplifies market turmoil | €45 billion fund downgrade |
| Vanguard | Hold & Watch | Exiting the Net Zero Asset Managers Initiative (NZAMI) reflects the chaotic consequences in the ESG space | Exit from NZAMI |
| ArcelorMittal | Hold & Watch | Even as ESG funds reduce holdings, 80% of its capital expenditure still goes to traditional blast furnace maintenance, showing limited influence from secondary markets | Share price fell 3% due to ESG divestment, but 80% of 2023 capex went to traditional blast furnaces |
| JSW Steel | Hold & Watch | Securing $1 billion via blended finance to build a hydrogen-based DRI plant is a positive case of transition finance | Carbon intensity to drop from 2.3 tCO₂/t steel to 0.5 t |