‘Green’ funds could be hit hard by the short-squeeze, Bank of America says
Bank of America has warned that so-called ESG funds could be impacted by the wild trading in markets, and listed the stocks it says are most at risk. Shares of several stocks including GameStop surged in January as retail investors piled in , while hedge funds with short positions on those stocks made heavy losses. This is known as a short squeeze . In a recent research note, Bank of America 's analysts said they are concerned that "ESG darlings" might be affected by "the next leg" of this trend. ESG funds are investment portfolios made up of stocks that rate highly on environmental, social and governance factors. Investors put "significant inflows" — $255 billion globally — into such funds in 2020, according to Bank of America. The bank's analysts, led by Savita Subramanian, identified the stocks at risk, naming those most popular with ESG funds. "ESG funds garnered significant flows in 2020. Amid the short-squeeze in stocks, we are concerned that the next leg of de-grossing may be in this pocket of the market," Bank of America said. De-grossing refers to the pulling back of all positions by hedge funds, both long and short, suggesting the analysts believe funds might start dumping ESG stocks to cover their costs. The bank listed the top stocks held by the highest percentage of ESG funds, with Microsoft ranking first (61%), followed by Home Depot (53%), water treatment company Ecolab (52%), Google's parent company Alphabet (52%) and Cisco Systems (51%). These were followed by Verizon , Apple , semi-conductor company Texas Instruments , Visa and Adobe . It also listed the stocks most highly rated by ESG funds, in relation to the benchmark S & P 500. Gap came top of the list, followed by water companies Pentair and Xylem , health tech firm Cerner Corporation and waste disposer Republic Services . These were followed by data storage firm Western Digital , medical device maker Hologic , transport company CH Robinson , fintech business Jack Henry and risk assessor Verisk Analytics . Both lists are based on ownership of 170 long-only funds — those that are expected to go up in value — that have an emphasis on ESG factors such as diversity and climate change. Bank of America argued that despite the risk of contagion from the recent market frenzy, ESG funds still have potential. "Barring temporary dislocations, we believe the ESG theme continues to have legs and would be buyers of fundamentally attractive ESG beneficiaries on weakness. ESG now has an ally in the White House, and more than 10 ESG-focused executive orders and memoranda have been signed by President Biden since his inauguration," the analysts wrote.

Brendan McDermid | Reuters