The author of this piece, William Bernstein is very, very sharp and one of the most lucid writers on topics fin/econ. From the introduction to a 2010 piece on Keynes' Paradox of Thrift:
I think it was Boston University's Zvi Bodie* who, shrugging off the restraints of his MIT PhD, pointed out to the "expected return" crowd that if it were true that the risk of negative returns decreases as the time frame increases, the cost of long-term puts should decrease the farther out you go.
Kind of an Emperor has no clothes thing to say....****William Bernstein (No slouch either, M.D. Neurologist, PhD. Chemistry, dabbler in Modern Portfolio Theory, Bestselling Author, etc.) in one of his Efficient Frontier pieces, "Zvi Bodie and the Keynes’ Paradox of Thrift" described the professor as "Academician, raconteur, and all-around good guy Zvi Bodie...".Then he rips his lungs out. Very typical in the academy....
And today's offering via Advisor Perspectives:
As predicted by financial theory, stocks of companies with positive environmental, social, and corporate governance (ESG) records underperformed the market. But the problems for ESG investors don’t stop there.
Recently, Advisor Perspectives published two articles on the problems with ESG investing; both are well worth reading.
The first, by Michael Edesess, noted that the marketing of ESG funds smacks of cynical, and occasionally meaningless, jargon aimed mainly at asset gathering and fee optimization, as opposed to any useful social or societal objective. The second, by Larry Swedroe, like Edesess, noted the wild proliferation of these funds, and also cited academic work that found that ESG funds not only did a poor job of selecting companies with low carbon emissions, but rather seemed to favor those with high lobbying expenditures.
Worst of all, ESG funds underperformed the non-ESG funds run by the same managers.
The underperformance of ESG offerings is, of course, to be expected; in fact, it falls directly out of basic equilibrium finance theory. Assume, for example, that half of investors arbitrarily shun companies whose tickers begin with the letter “A.” The price and valuations of those companies will fall and dramatically raise their expected returns to their remaining investors.
Something of the sort has happened with tobacco and alcohol stocks which, over nearly the past century, have been shunned, for political or religious reasons, by a number of investors, the results of which are clearly visible in the table of industry returns since 1926:
Table 1. Returns of Industry Groups, July 1926 to September 2021
*****
Investors who took tobacco and alcohol stocks off the hands of the righteous did well indeed, earning annualised returns that were 183 and 161 basis points higher, respectively, than the market. These two margins, when annualized over nearly a century, are hardly chump change....
....MUCH MORE
Our preferred approach to doing good by doing well is 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"
So, with Wesley thundering in our ears we flash back to an April 2007 post, "Moral Judgment On 'Sin Stocks' Means Higher Returns For Vice-Friendly Investors" where we explained:
...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!...
