Thursday, February 20, 2020

ESG: Lowest Ranked Stocks Beat Both the Wider Market and ESG ETFs

Following up on the post immediately below, "Climate activists would be better off buying BP".

I haven't personally double-checked the performance rankings but on the surface the result makes sense, see after the jump.
From the twitter feed of Eric Balchunas, Senior ETF analyst for Bloomberg Intelligence:
From April 2007 (hey, we're nothing if not patient):
Moral Judgment On 'Sin Stocks' Means Higher Returns For Vice-Friendly Investors
That's the headline of a press release from the University of British Columbia's Sauder School of Business announcing the release of a draft paper by the school's Prof. Marcin Kacperczyk and Princeton Economics Prof. Harrison Hong.

Prof. Hong lists his research interests as:
 "Asset pricing with less-than-fully-rational investors; differences of opinion, short-sales constraints and asset prices; social interaction and financial markets; career concerns, biased forecasts and security analysts; organization, performance and mutual funds; asset pricing with asymmetric information and other market imperfections."
Hey! Mine too!

A quote from page 4 (of 50):
"In contrast to institutional investors, individual investors can keep their stock positions out of the view of enforcers of societal norms, and therefore we expect individual investors to be more willing than institutional investors to hold sin stocks."
The fact that an individual investor (or hedgie) won't be elbowed away from the trough by CALPERS means your entry price into a name won't carry a societal approval premium. On the other hand your exit price will be lower to the extent your universe of buyers is limited to vice-savvy investors (hedgies)....
Here's the UBC press release:
Moral Judgment on “Sin Stocks” Means Higher Returns for Vice-Friendly Investors: UBC Study

And here's the version of the paper hosted at Columbia:
The Price of Sin: The Effects of Social Norms on Markets

Further into the Twitter thread Mr. B makes the point that the low ESG stocks are distinct from the Vice stocks and he's right both in his categorization and in their performance.
The Vice stocks tend to be deep value issues which have dramatically underperformed large-cap growth during the current bull run.

As to ourselves we lean toward a variation on John Wesley's Sermon 50, The Use of Money (1744) which contains the admonition:

"Earn all you can, Save all you can, Give all you can" 
See also:
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