Monday, July 20, 2020

ESG Investing in the Pandemic Shows Power of Luck

Multiplicity of environmental, social and governance grading schemes sows confusion

By James Mackintosh of The WSJ.

I am usually interested in these articles since economists say that people act on their own self interest. But in this case, they may be trying to be a bit altruistic if they accept lower returns to invest in ESG. If they are not getting lower returns, then maybe it is not altruistic.

"Does ESG investing make money? The trouble with asking about environmental, social and governance investing is that it isn’t a thing that can be measured—or rather, it is lots of things all measured differently."

"ESG investing makes money" (fund managers  say)

"Reams of studies show ESG outperforming traditional approaches.

The trouble is that reams of other studies show ESG underperforming. The reason is simple: there is no one thing that’s ESG investing"

"there is no consistent answer to the question of whether ESG has outperformed."

"Even from a single index provider you can get different results. MSCI’s USA Extended ESG Focus index, which aims to minimize divergence from the wider market, beat MSCI USA—its equivalent to the S&P 500—both for the year so far and since stocks peaked on Feb. 19. But the MSCI USA ESG Leaders index is slightly behind for the year, and has fallen more than a percentage point more than the ordinary index since the February top.

Use S&P or FTSE Russell indexes and you get different answers, too. The ESG version of the S&P 500 handily beat the benchmark this year; the Russell 1000 ESG index fell more than the ordinary index.

Even where an ESG index did beat the market, it had little to do with environmental, social or governance issues. Instead, it came down to luck: did they happen to pick the stocks that best rode out coronavirus lockdowns? It is better to be lucky than right; but having, as some did, less exposure to cruise liners or long-haul airlines because of their carbon footprint was luck, not a well-thought-out way to avoid the stocks hurt most by Covid-19. There are several reasons why Microsoft tends to score well on ESG, but its cloud services being in demand because everyone is working from home isn’t among them."

"The ESG measures are so different that one of them is almost bound to be outperforming over any given period. There‘s almost certainly another that is underperforming."

"A chairwoman trying to find something to boast about in her company’s annual report need only split the E, S and G scores separately and look across the rating agencies, and the business is bound to be above average on something. Florian Berg of MIT Sloan School of Management examined five scoring systems for 924 companies, and found that only 35 of them were below median on each of the E, S and G scores from all five rating agencies in 2017."
Related posts

ESG Investing Shines in Market Turmoil, With Help From Big Tech: The strength of socially responsible funds suggests they have staying power; ‘ESG is not a fad’

Funds that market themselves as sustainable investments aren’t necessarily focused on companies that fight climate change, develop wind turbines or promote diverse boards

ESG Funds Draw SEC Scrutiny (companies that pursue strategies to address environmental, social or governance challenges)

Is it a retailer’s job to keep shoppers from their vices? (or Adam Smith vs. CVS pharmacy)

Can You Find Virtue by Investing in Vice?

What if companies pledge to adhere to social and environmental accountability guidelines?

Conspicuous Consumption, Conspicuous Virtue, Thorstein Veblen (and Adam Smith, too!) 

Data show that socially responsible investments can outperform the S&P 500 index

Is altruism a result of selfishness?

Do you have to be selfish to make more money?

Does collective self-deception mask selfish behavior?

Why Doing Good Makes It Easier to Be Bad

Businesses intentionally display their social and environmental performance in addition to their financial performance to stakeholders

Should you invest according to religious guidelines?

For a humorous view of this issue see

A Snickers a Day Keeps the Doctor Away: Why does CVS want to make my migraine cures hard to find? by Joseph C. Sternberg of the WSJ

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