Saturday, August 29, 2020

"Academics Attack ESG for Failure to Outperform During Crisis"

From Institutional Investor, August 20:
A new study refutes “widespread claims” that environmental, social, and governance considerations improved stock performance during the pandemic.

In the aftermath of March’s coronavirus crash, numerous fund managers and data providers determined that companies with high ESG scores outperformed during the rapid sell-off — and a surge of money followed into funds focused on environmental, social, and governance issues.
A new academic study, however, raises questions about the link between ESG considerations and stock performance during crises.

Researchers from Canada’s University of Waterloo, Tilburg University in the Netherlands, and New York University’s Stern School of Business challenged the “widespread claims by fund managers, ESG data purveyors, and the financial press” that companies with high ESG scores were better situated in the pandemic. In particular, the authors — Elizabeth Demers, Jurian Hendrikse, Philip Joos, and Bauch Lev — cited reports from BlackRock, Morningstar, and MSCI, which all found that ESG funds outperformed during the crash.

BlackRock, for instance, reported its sustainable funds achieved better risk-adjusted returns during the first quarter, while 24 of 26 ESG-tilted index funds tracked by Morningstar also outperformed their “closest conventional counterparts,” according to the analytics firm.
According to the academics, however, ESG scores “offer no such positive explanatory power for returns during Covid-19.”

“ESG is not an ‘equity vaccine’ against declining share prices in times of crisis,” Demers and her co-authors argued. “Following all this hyping of ESG as downside risk protection, there was no surprise in CNBC’s report that the first quarter of 2020 saw record inflows into sustainable funds.” ...

I had never heard the "ESG will save your portfolio" pitch although some of the true believers (and the marketeers) come close to selling them as the all-purpose nostrum: "It's the cure fer what ails ye."

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"