For some time now, there has been a backlash against ESG investing. This backlash is arguably much more pronounced in the US where the topic has become politicised than in Europe. Plus there are cultural differences that can explain attitudes toward ESG investing.
I ran a global sustainability fund for a European fund manager for a few years, and perhaps my pragmatic American side came out when I'd pitch why I thought applying ESG criteria in holistic investment analysis was useful: "it generally helps you identify bad management behavior, and if you avoid that, you avoid torpedoes in your portfolio".
That said, one of the most important reasons our fund posted better-than-benchmark results was that we had 20% leeway in our fund guidelines to buy stocks which might not *yet* meet all the ESG criteria, but were on the way to doing so. Our competitors were generally restricted to only buying stocks that an external ratings agency had *already* selected and rated as ESG-compliant, so their customers were essentially offered a high-fee index fund with the stock picking done by desk analysts at a third-party data provider. I used to joke "that's a bit like having a fund restriction requiring the PM to only buy stocks witha P/E within one standard deviation of the market P/E, with no opportunity to bottom-fish value stocks nor buy high-P/E stocks that grow into their valuations over time".
Plus, over time we discovered some of the criteria were capricious: One data vendor took great pains to deliniate the makers of light chocolate and dark chocolate, but then black-listed any firm that made "turbines"; they were screening out makers of jet warplanes, but that also meant no wind turbine manufacturers made the cut. One morning we woke up and discovered that one megacap US tech company was blacklisted because the agency had unilaterally determined that "it didn't abide by the spirit of European GDPR". Okay, but one could say that about *all* megacap tech companies, so why that company in particular? And what about the "truthiness" aspect of spirit vs. letter of the law? There was also evident geographic bias in negative scoring; Nike and Adidas used practically identical supply chains and subcontractors, and have very similar enviromental footprints (no pun intended), but you can guess which always seemed to receive higher scrutiny.
The objective of investing in stocks is to make money - saving for old age or otherwise. ESG is very much secondary: if you want to support good causes give to charity.
ESG investing is not wrong per se. I have my types of stock business which I avoid. Rather we need EDUCATION of PIs so that they can see WHY an ESG stock claims to be such, and see through the misleading factors; further to identify high charges closet trackers.
The E factor is the most misused: criticizing companies with high CO2 (absolute emissions) but trying to reduce it (relative improvement).
The most useful is the G factor, when properly used. Russell Napier has a good anecdote: he wanted to improve board access for people without a private education, Oxbridge old boys & girls etc. Napier telephoned the ESG supervisor and was told “No, do not appoint on that basis but add a woman director and it improves your G: it matters not that she went to Roedean & Oxbridge”.
The sensible approach is “Are the directors independent of the investments manager and do they own shares in the company” [preferably not by zero exercise stock options].
Companies & brokers could write and publish simple, understandable articles on ESG.
I think ESG investing is wrong. ESG should be managed by the consumers, not by producers and investors. These should do what consumers demand, not the other way around.
The ESG—or environmental, social, and governance investment- provides an investment category that is too broad. A company polluting the environment but selecting the right individuals to meet the social part of ESG criteria and still be part of ESG companies or funds. Being socially responsible can mean vastly different things to different people. Unless you look under the hood, you will not know if a company meets your definition of socially accountable, like the example I provided above, as the above example may not meet an environmentally conscious investor but can still be part of an ESG fund.
Not only is there no single criterion for what makes a company socially conscious, but there’s also no reporting requirement, and most companies claiming to ESG may not be one.
A few years back, when oil and gas stocks were doing well in the US, I am sure quite a few people may have dumped ESG funds. Now, since they are not doing as well, I am sure quite a few people may have moved back to ESG funds. Performance chasing is a real phenomenon and very hard to resist unless you are one of those invest-and-forget investors.
I also agree that the people you are around most of the time influence you across several areas, including where you will invest your money.
I buy the Total World Index Fund from Vanguard and let the market decide whether a company will stay afloat or die.
wellington and pzena does more ESG inflecting companies, sometimes as suggestivists.
i presume their data well informs them whether this effort provides risk-adjusted alpha.
its not a coincidence that all offer low-cost vehicles, but is it because they themselves want some ESG or due to competition? or simply because regardless, it works.
I ran a global sustainability fund for a European fund manager for a few years, and perhaps my pragmatic American side came out when I'd pitch why I thought applying ESG criteria in holistic investment analysis was useful: "it generally helps you identify bad management behavior, and if you avoid that, you avoid torpedoes in your portfolio".
That said, one of the most important reasons our fund posted better-than-benchmark results was that we had 20% leeway in our fund guidelines to buy stocks which might not *yet* meet all the ESG criteria, but were on the way to doing so. Our competitors were generally restricted to only buying stocks that an external ratings agency had *already* selected and rated as ESG-compliant, so their customers were essentially offered a high-fee index fund with the stock picking done by desk analysts at a third-party data provider. I used to joke "that's a bit like having a fund restriction requiring the PM to only buy stocks witha P/E within one standard deviation of the market P/E, with no opportunity to bottom-fish value stocks nor buy high-P/E stocks that grow into their valuations over time".
Plus, over time we discovered some of the criteria were capricious: One data vendor took great pains to deliniate the makers of light chocolate and dark chocolate, but then black-listed any firm that made "turbines"; they were screening out makers of jet warplanes, but that also meant no wind turbine manufacturers made the cut. One morning we woke up and discovered that one megacap US tech company was blacklisted because the agency had unilaterally determined that "it didn't abide by the spirit of European GDPR". Okay, but one could say that about *all* megacap tech companies, so why that company in particular? And what about the "truthiness" aspect of spirit vs. letter of the law? There was also evident geographic bias in negative scoring; Nike and Adidas used practically identical supply chains and subcontractors, and have very similar enviromental footprints (no pun intended), but you can guess which always seemed to receive higher scrutiny.
The objective of investing in stocks is to make money - saving for old age or otherwise. ESG is very much secondary: if you want to support good causes give to charity.
ESG investing is not wrong per se. I have my types of stock business which I avoid. Rather we need EDUCATION of PIs so that they can see WHY an ESG stock claims to be such, and see through the misleading factors; further to identify high charges closet trackers.
The E factor is the most misused: criticizing companies with high CO2 (absolute emissions) but trying to reduce it (relative improvement).
The most useful is the G factor, when properly used. Russell Napier has a good anecdote: he wanted to improve board access for people without a private education, Oxbridge old boys & girls etc. Napier telephoned the ESG supervisor and was told “No, do not appoint on that basis but add a woman director and it improves your G: it matters not that she went to Roedean & Oxbridge”.
The sensible approach is “Are the directors independent of the investments manager and do they own shares in the company” [preferably not by zero exercise stock options].
Companies & brokers could write and publish simple, understandable articles on ESG.
I think ESG investing is wrong. ESG should be managed by the consumers, not by producers and investors. These should do what consumers demand, not the other way around.
Correct about the social pressure and conformity.
Also what people say they think isn't the same as what they actually think and do.
Do you intend to have a healthy diet of balanced organic foods? Is this important to you?
People = yes and yes
What did you have to eat yesterday?
People = Sunday lunch and all the trimings. Went to the pub in the evening and had five pints of beer.
The ESG—or environmental, social, and governance investment- provides an investment category that is too broad. A company polluting the environment but selecting the right individuals to meet the social part of ESG criteria and still be part of ESG companies or funds. Being socially responsible can mean vastly different things to different people. Unless you look under the hood, you will not know if a company meets your definition of socially accountable, like the example I provided above, as the above example may not meet an environmentally conscious investor but can still be part of an ESG fund.
Not only is there no single criterion for what makes a company socially conscious, but there’s also no reporting requirement, and most companies claiming to ESG may not be one.
A few years back, when oil and gas stocks were doing well in the US, I am sure quite a few people may have dumped ESG funds. Now, since they are not doing as well, I am sure quite a few people may have moved back to ESG funds. Performance chasing is a real phenomenon and very hard to resist unless you are one of those invest-and-forget investors.
I also agree that the people you are around most of the time influence you across several areas, including where you will invest your money.
I buy the Total World Index Fund from Vanguard and let the market decide whether a company will stay afloat or die.
robeco does passive ESG for resilience.
wellington and pzena does more ESG inflecting companies, sometimes as suggestivists.
i presume their data well informs them whether this effort provides risk-adjusted alpha.
its not a coincidence that all offer low-cost vehicles, but is it because they themselves want some ESG or due to competition? or simply because regardless, it works.