An Inconvenient Truth About ESG Investing

By Sanjai Bhagat. He is a professor of finance at the University of Colorado. Excerpts:

"ESG funds certainly perform poorly in financial terms. In a recent Journal of Finance paper, University of Chicago researchers analyzed the Morningstar sustainability ratings of more than 20,000 mutual funds representing over $8 trillion of investor savings. Although the highest rated funds in terms of sustainability certainly attracted more capital than the lowest rated funds, none of the high sustainability funds outperformed any of the lowest rated funds."

"ESG funds don’t seem to deliver better ESG performance either."

"companies in the ESG portfolios had worse compliance record for both labor and environmental rules [than companies in non-ESG portfolios]."

"companies added to ESG portfolios did not subsequently improve compliance with labor or environmental regulations."

"A recent European Corporate Governance Institute paper compared the ESG scores of companies invested in by 684 U.S. institutional investors that signed the United Nation’s Principles of Responsible Investment (PRI) and 6,481 institutional investors that did not sign the PRI during 2013–2017. They did not detect any improvement in the ESG scores of companies held by PRI signatory funds subsequent to their signing . Furthermore, the financial returns were lower and the risk higher for the PRI signatories."

"setting ESG targets may actually distort decision making"

"also some evidence that companies publicly embrace ESG as a cover for poor business performance."

"when managers underperformed the earnings expectations (set by analysts following their company), they often publicly talked about their focus on ESG. But when they exceeded earnings expectations, they made few, if any, public statements related to ESG."

"funds investing in companies that publicly embrace ESG sacrifice financial returns without gaining much, if anything, in terms of actually furthering ESG interests."

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For a humorous view of this issue see

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