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 report argues that oversimplified ESG investing (which focuses on environmental, social, and governance factors) is causing capital to flow into narrow areas like renewables, while starving traditional energy sectors like coal and oil. Hosking Partners sees this as an opportunity: as capital dries up, supply shrinks, and returns for these industries could rise. They highlight Canadian oil sands producers as a key example, believing these companies will benefit from limited supply and scarce capital. They also criticize the International Energy Agency (IEA) for overly optimistic net-zero forecasts.
One-sentence summary: The author argues that overly simplistic ESG strategies are leading to capital misallocation, while Hosking Partners’ capital cycle framework enables a contrarian bullish view on supply-constrained traditional energy sectors abandoned by ESG sentiment. [Cautiously Optimistic]
The article opens with quotes from Christopher Hitchens and Laozi, emphasizing that questioning the "obvious" and the "known" is a key element of the principle that "everything should be doubted" in investing. The author argues that confusion over the role and meaning of ESG is leading to capital misallocation. At the core of the issue are two different interpretations of what ESG actually means: one views it as "impact funds" requiring asset managers to go beyond financial returns; the other sees it as a tool to enhance long-term value assessment, with the core still being the pursuit of the best risk-adjusted returns. The article points out that regulators and the public are forcing managers focused solely on returns to mimic impact funds, squeezing out genuine "impact funds." The author's original words are: "Neither interpretation is wrong. But there are fundamental differences in the degree of agency different types of investment have to affect each approach." This means: "Neither interpretation is wrong. But there are fundamental differences in the degree of agency different types of investment have to affect each approach." This leads to confusion and prevents capital from being allocated in the most optimal way.
Hosking Partners believes that the integration of ESG should naturally derive from its "capital cycle" investment philosophy, rather than being artificially attached. The firm emphasizes that its team consists of generalist investment managers and analysts, with no siloed specialist divisions, which naturally inclines them toward long-term, cross-disciplinary, and contrarian thinking. The author notes that the language of the capital cycle helps describe how capital inflows and outflows affect competitive behavior within industries, thereby providing insight into the direction of future returns on capital. This investment approach is naturally inclined to consider long-term, intangible value drivers. The article judges that management teams better at managing risk, allocating capital, and maintaining a social license to operate should command a valuation premium. The author's original words are: "it seems self-evident that those executive teams that are better at managing risk, allocating capital, incorporating fair but dynamic governance regimes, and maintaining a societal license to operate should justify a premium in investors’ assessments of the companies they lead, and thus make for better investments." This means: "it seems self-evident that those executive teams that are better at managing risk, allocating capital, incorporating fair but dynamic governance regimes, and maintaining a societal license to operate should justify a premium in investors’ assessments of the companies they lead, and thus make for better investments."
Hosking Partners' contrarian style allows it to find opportunities outside the ESG consensus, particularly in traditional economic sectors overlooked by capital. The article points out that the oversimplification of complex issues like the energy transition in recent years has distorted global capital flows. As a result, necessary but unpopular traditional economic sectors (e.g., energy, materials, and industrials) are facing capital depletion and consolidation, while asset-light growth industries (e.g., IT) attract capital and lead to overcapacity. The author judges that future returns on capital will rise for the former and fall for the latter. The firm believes its capital cycle approach both encourages the assessment of long-term, intangible value drivers and simultaneously exposes attractive opportunities created by market participants adopting superficial or short-term perspectives. The article does not mention specific company targets but focuses on investment methodology and themes.
When ESG-driven divestment leads to industry supply contraction and capital withdrawal, the capital cycle framework instead identifies potential return opportunities. The article uses the coal industry as an example: regulatory pressure makes it difficult for banks and insurance companies to provide financing to coal mining companies, raising their cost of capital and depressing returns. Meanwhile, secondary market participants, swayed by narratives of declining demand and stranded assets, or acting on simplistic ESG strategies, sell off shares, causing valuations to fall and index reweighting. The industry's response is to cut capital expenditure and consolidate. The author notes that readers familiar with the capital cycle perspective will recognize this as an attractive setup—declining invested capital combined with supply consolidation drives up returns on capital, and valuations subsequently rise. The author emphasizes that this is not a natural fluctuation of the business cycle, but rather supply being artificially compressed ahead of demand, predicated on the belief that other alternative energy sources are sufficiently viable, affordable, and available—which may not be the reality. The article cites a chart (Required vs actual investment in primary energy), pointing out that in the hydrocarbon sector, investment in potential alternatives such as nuclear energy, renewable energy, or decarbonized natural gas is severely insufficient, exacerbating the situation.
The author states their position directly: "At Hosking Partners, our supply-focused, qualitative, long-term outlook – combined with the wider consideration of ESG issues – lends us the confidence to go against the crowd." This means: "At Hosking Partners, our supply-focused, qualitative, long-term perspective—combined with a broader consideration of ESG issues—gives us the confidence to go against the crowd." The firm believes that buying and selling stocks in the secondary market only has an indirect real-world impact, whereas continuing to hold shares and using active ownership tools (voting and engagement) to influence corporate decisions and protect long-term value creation often drives change more effectively. Canadian oil sands producers are cited as a current example, argued to embody a scenario where, under supply constraints and capital scarcity, companies pursuing the most responsible long-term strategies will achieve greater long-term returns.
The article criticizes the "demand fatalism" prevalent in ESG investing—using a set of assumptions to project future demand while ignoring the real-world constraints on supply. The author points out that over the past decade, when interest rates approached zero, the weight of future cash flows in asset valuations increased; the lower the discount rate, the greater the inflationary effect of future cash flows on present value, and the further out in time, the more speculative their amplitude. The author argues that assessing supply is a relatively mundane task, while forecasting demand is an emotional exercise—supply is concrete, demand is storytelling. Growth stock portfolios rely on compelling stories about future demand to support high valuations; buying into such a portfolio means endorsing that future vision.
The article sharply notes that problems arise when measures are taken to restrict today's supply in order to shape tomorrow's demand: if reflexivity or second-order consequences are not fully considered—specifically, what happens if alternative supply is insufficient and demand proves more resilient than expected—such "engineering" efforts invite shortages and capital misallocation. Common examples are cited: EU ban on internal combustion engines by 2030 → EV demand at least X; US passenger cars fueled by green hydrogen by 2040 → electrolyzer demand Y; global warming limited to 1.5°C → target A demand at least B. The author argues that the more "if... then" statements required to support a demand forecast, the more detached it becomes from reality. Blue ammonia, green hydrogen, direct air capture and other inefficient, expensive technologies are portrayed as inevitably experiencing exponential demand growth, but behind this lies a chain of "if" assumptions. The article specifically calls out the International Energy Agency (IEA), criticizing its net-zero pathway for requiring global energy demand to decline from current levels to make its supply figures work—this "back-solving" would require breaking the correlation between energy use and prosperity that has held for at least the past 500 years. The author questions this logic and argues it instead creates opportunities.
Hosking Partners' capital cycle framework naturally makes it resistant to emotional demand stories and inflated valuations, while favoring carbon-intensive industries where ESG sentiment has led to underinvestment in capital and supply shortages. The firm believes that the emotional momentum of the energy transition and the desire to decouple from carbon-intensive industries are causing capital underinvestment to outpace demand decline, thereby triggering supply shortages and industry consolidation—precisely the scenario the capital cycle framework signals will yield substantial returns. The author emphasizes that confidence in this judgment stems from ongoing research into ESG-related trends, the incorporation of long-term intangible assets into investment analysis, and active ownership of portfolio companies. Institutional perspective bias: This article is a self-defense from a position-holding perspective; the author uses capital cycle logic to justify their contrarian holdings. Readers should note the potential underestimation of risks from accelerated ESG regulatory tightening and policy shifts.
The article opens by quoting Charlie Munger’s maxim that investors should strive to be "consistently not stupid" rather than "very smart," and uses this to critique the over-simplistic approaches prevalent in current ESG investing. The author argues that demand-driven "alignment strategies" have crowded capital into a narrow range of assets, whose returns look set to disappoint as the singular future version of the world they rely upon fails to materialise precisely in the manner anticipated. The author’s original statement is: "Over-simplistic approaches to ESG – such as the demand-driven alignment strategies described above – have crowded capital into a narrow range of assets whose returns looks set to disappoint as the singular future version of the world they rely upon fails to materialise precisely in the manner anticipated." This means: "Over-simplistic ESG approaches—such as the demand-driven alignment strategies described above—have crowded capital into a narrow range of assets, whose returns look set to disappoint as the singular future version of the world they rely upon fails to materialise precisely in the manner anticipated."
The author further notes that the more concentrated the bet, the greater the risk. Given that even the Intergovernmental Panel on Climate Change (IPCC) has doubts about the possibility of limiting global warming to 1.5 degrees Celsius, the wisdom of institutions like the Net Zero Asset Manager’s Initiative, which require members to align their portfolios with an increasingly unlikely future, is questionable from a risk-return perspective. The author believes a more prudent approach is to direct capital toward impact funds that can genuinely demonstrate a "secondary mandate." The article concludes with an ironic observation: The capital misallocation driven by over-simplistic ESG is, in fact, hindering the very energy transition it claims to promote.
| Concept | What the Author Criticizes | What the Author Advocates |
|---|---|---|
| ESG Strategy | Over-simplistic "alignment strategies" betting on a single future | Directing capital into impact funds that can prove a "secondary mandate" |
| Risk Perception | The more concentrated the bet, the greater the risk | Diversified portfolios should account for scenarios where the transition fails |
| Ultimate Effect | Capital misallocation, hindering the energy transition | Acknowledging complexity, avoiding wishful capital allocation |
The article emphasizes that how an asset manager "does" ESG should naturally complement its investment approach, reflected in the philosophy and processes underpinning that approach. Using Hosking Partners as an example, the firm is willing to invest in areas of the market that are out of favor, based on two core beliefs, both influenced by its ESG approach. The primary belief is that these ideas can generate long-term excess returns for clients; the second is that integrating financial and non-financial analysis from the bottom up helps uncover long-term valuation opportunities overlooked by the market. The foundation of these beliefs is its "capital cycle" investment approach, which studies companies and their industries from a holistic perspective, considering the interplay of financial, behavioral, and systemic factors.
The author explicitly acknowledges that, as a diversified manager primarily investing in secondary equity markets, owning or not owning a specific part of the market likely has a negligible impact on the real world. Therefore, while active ownership and engagement are important aspects of prudent day-to-day management, their purpose should always be closely tied to creating value for clients. The article concludes by urging resistance to the impulse to apply ESG in isolation, without full holistic integration. Against the backdrop of an energy transition that will be extremely costly even under the most optimistic scenarios, we cannot afford the resulting capital misallocation.
| Instrument | Direction | Author's One-Sentence View | Key Data |
|---|---|---|---|
| Canadian Oil Sands Producers | Hold & Observe | Companies adopting the most responsible long-term strategy amid supply constraints and capital scarcity will achieve greater long-term returns | No specific financial data provided |
| Coal Industry (General) | Hold & Observe | Regulatory divestment leads to supply contraction and consolidation; the capital cycle framework identifies potential return opportunities | Banks and insurers struggle to provide financing, pushing up capital costs and depressing returns |
| Blue Ammonia, Green Hydrogen, Direct Air Capture | Not Specified | Portrayed as inefficient and costly technologies with an assumed exponential demand growth, backed by a chain of "if" assumptions | No specific data provided |
| International Energy Agency (IEA) | Not Specified | Criticized for its "back-solving" net-zero pathway, which requires breaking the historical correlation between energy use and prosperity | Requires global energy demand to decline from current levels |