ESGimme a Break

ESGimme a Break

I got a request from a client to talk about ESG investing. The title probably tells you all you really need to know about my opinion. Here’s a slightly longer take:

ESG is a marketing device where the main goal is justifying an increase in fees.

A little more detail: ESG is the idea that investors should take into account the Environmental, Social, and Governance risk in a business. How? Well, I’m not aware of an agreed-upon set of rules, so however the investment company wants to do it. As a marketing scheme, it seemed to work. Even bonds labeled as ESG got friendlier terms, at least for a while.

ESG has been popular because it has done well. Tech, for example, is broadly considered to be ESG friendly. Tech has outperformed, helping ESG to do well. Ample liquidity has also helped some of the zanier ideas perform well, at least for a while.

A study by KPMG in 2020, which looks like their most recent study on the subject, says that most large companies can be considered ESG compliant to one extent or another. If that’s the case, I don’t see how you get anything special out of it. I also don’t see how ESG investing makes any difference to the environment, which is one of the claims. I can see how it could help marketing efforts for some groups.

Eventually, ESG will fail to justify the extra fees and fade into the night. To some extent, this is already happening, as tech and less ESG-friendly areas like energy soars. The table below, from etf.com, compares SUSA, a large ESG ETF to the S&P 500 index.

2022 hasn’t been kind to ESG. For that matter, the last 12 months have been rough, with non-ESG names starting to really take over performance from more traditionally ESG-oriented stocks. In terms of SUSA, the historical outperformance is gone. At least you get to pay nearly triple the fee (25bps vs. 9bps) for it.

Investors are certainly allowed to limit the stocks they want to invest in for whatever reason they may have. Expecting to outperform by always excluding a group from consideration, limiting your universe, seems to be an unlikely way to improve performance over time.