Nvidia now tops Tesla as ESG funds increase their exposure to AI

(Bloomberg) – The stratospheric rise of Nvidia Corp. has attracted at least 100 other ESG funds in recent weeks, making the company one of the most popular stocks among wealth managers who integrate environmental, social and governance metrics into their investment strategies.

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According to data from Bloomberg, based on the latest filings, there are now over 1,400 ESG funds directly holding Nvidia. Another 500 are indirectly exposed, the data show. Nvidia shares hit a record high this week, giving the company a roughly 200% gain in 2023 so far.

According to Bloomberg data, the company is now more popular with ESG investors than traditional green powerhouses such as Vestas Wind Systems A/S and Tesla Inc ‘, or they just market themselves as ESG.

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

Daniel Klier, chief executive of sustainability data and technology company 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 aligned to the critical global warming threshold of 1, 5°C

Peter Krull, partner and director of sustainable investing at Earth Equity Advisors, a Prime Capital Investment Advisors company, says Nvidia is “absolutely” a good sustainable investment. “They are taking the steps that big companies need to take to both be lighter on the planet with their products and to help innovate,” he said.

ESG's growing involvement in technology – and artificial intelligence in particular – has the potential to change the narrative of an investment strategy that has suffered from numerous headwinds over the past year. Amid an energy crisis and rising interest rates, ESG has been the target of political attacks in the US. Republicans have called ESG an anti-American form of business and investment that promotes a “woke” agenda over financial returns.

This year, however, ESG funds' reliance on technology is leading to outperformance. The best ESG funds of 2023 so far are all tech-heavy and invested in AI, and all have returned more than 40%. In Europe, ESG equity funds have returned about 12% on average this year, compared to gains of about 8% for the Stoxx Europe 600 Index.

Among the ESG-registered funds with the highest returns so far in 2023 is a fund managed by T. Rowe Price Group Inc. (Ticker: TRGBTEA LX), which is up about 46%. According to Bloomberg data, Nvidia is the company's fourth-largest holding. The fund, whose top 3 stocks are Apple Inc., Taiwan Semiconductor Manufacturing Co. and Microsoft Corp. has beaten 97% of its peers since the end of December.

An ESG fund of the wealth management unit of JPMorgan Chase & Co. (ticker: JPMUSTC LX) is also up 46%, according to Bloomberg data. Its largest holdings are Facebook parent company Meta Platforms Inc. and Nvidia.

The Nasdaq 100 Stock Index, whose three weighted stocks are Microsoft, Apple, and Nvidia, is up nearly 40% this year.

As investors flock to AI, Europe and the US ponder how best to regulate it to contain it, while some of the scientists behind the technology warn that without proper safeguards, it could pose a serious threat to society.

But Boudreault says that if done right — and with the right regulatory boundaries — the “AI revolution” could actually have “massive positive impact in addressing the world's most pressing challenges, be they social or environmental.”

Meanwhile, the mania surrounding AI stocks is starting to seem overblown for some. Cathie Wood, founder and CEO of Ark Investment Management LLC, said earlier this year she decided to ditch Nvidia as the company faces growing competition. Instead, Wood is aiming for “another series of plays,” she said.

READ ALSO: Cathie Wood Defends Exit From Nvidia Citing Risk Of Chip Cycle

James Penny, chief investment officer of TAM Asset Management and a veteran investor who correctly predicted the headwinds for ESG over the past year, said earlier this month that the current sentiment around AI is reminiscent of the early days of the tech bubble that burst in 2000 lost more than 70% on the Nasdaq.

“I think the market has made ends meet a little bit,” he said in his comments, first published on June 12. “I'd put a lot bigger odds on it going further down from here.”

If these forecasts are correct, there is a risk that even companies with robust sales and earnings models will falter. The dot-com bubble wiped out Microsoft's market value by about 60%. Since then, however, it has increased by around 1,500%.

Chasing a market frenzy “is never a good strategy,” Boudreault said. But if the question is whether holding Nvidia makes sense from an ESG perspective, then the answer is “increasingly yes,” he said.

– With the support of Amine Haddaoui and Carlo Maccioni.

(Adds comment by Peter Krull in sixth paragraph.)

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