From Aswath Damodaran's Musing's on Markets Substack, March 28:
My views on ESG are not a secret. I believe that ESG is, at its core, a feel-good scam that is enriching consultants, measurement services and fund managers, while doing close to nothing for the businesses and investors it claims to help, and even less for society. That judgment may be harsh, but as the Russian hostilities in Ukraine shake up markets, the weakest links in the ESG chain are being exposed, and as the same old rationalizations and excuses get rolled out, I believe that a moment of reckoning is arriving for the concept. If you remain a true believer, I will leave it up to you to decide how much damage has been done to ESG, and what comes next.
The ESG Response To Russia
When Russian troops advanced into Ukraine in late February, the reverberations across markets were immediate. Stock, bond and commodity markets all reacted negatively, and at least initially, there was a flight to safety across the world. Since one of ESG's sales pitches has been that following it’s precepts would insulate companies and investors from the risks emanating from bad corporate behavior, both ESG advocates and critics have looked to its performance in this crisis, to get a measure of its worth. I am not an unbiased observer, but the reactions from ESG defenders to this crisis can be broadly categorized into three groups.
1. The Revisionists
In the last decade, as ESG has grown, I have been awed by the capacity of some of its advocates to attribute everything good that has happened in the history of humanity to ESG. If these ESG revisionists are to be believed, if companies had adopted ESG early enough, there would have been no banking crisis in 2008, and if investors had screened stocks for ESG quality, they would not have lost money in the corporate scandals and meltdowns of the last decade. In the last week of February 2022, in the immediate aftermath of this crisis, there were a few ESG supporters who argued that ESG-based investors were less exposed to the damage from the crisis. That was quickly exposed as untrue for three reasons:....
....MUCH MORE
A few prior posts, some seasoned with just a hint of of snark:
September 7, 2021
"SEC Cracks Down On "Dubious" ESG Labels Tied To $35 Trillion In Assets"
What's to crack down on? With $35 TRILLION in assets wearing the ESG label I had assumed all of our E to the S to the G problems were solved and Nirvana was just around the corner..
(actually it's probably just regulatory capture by BlackRock: they want to be the sole determiner/arbiter of who gets the label)
Dec 2020
Knowledge@Wharton:: "Why ESG Investors Are Happy to Settle for Lower Returns"
Warning: Because there is a paucity of alt-energy stocks that don't rely on cobalt mined by children in the DRC (for example), certainly not $30 trillion worth, the vast majority of equities touted as ESG by the marketeers are tech stocks.
In part this is because the Google's of the world can claim energy efficiency by talking revenue per kilowatt of electricity used or carbon neutrality because their data centers use hydro-produced electricity or because they don't have smokestacks that some ambush photojournalist can snap pictures of or, whatever.
What this means in practical terms is that when you buy ESG you are buying growth and hypergrowth stocks. Meaning that if there actually is a rotation to value/small cap/other factors etc,. ESG is going to lag, possibly dramatically and ESG investors had better be resigned to underperformance for a long time, and possibly until behaviors are mandated by force of law..
This isn't where the below piece is going but is something that should be top-of-mind any time the subject comes up....
March 2021
"Why the Biggest U.S. ESG Fund Has No Direct Renewable Holdings"
We've covered some of this ground in prior posts, links below....
September 2020
Professor Damodaran: "Sounding good or Doing good? A Skeptical Look at ESG"
October 2018
Some Thoughts on Environmental, Social & Governance Investing (ESG)
It is still an open question whether ESG investing is more than marketing/packaging by asset gatherers.
And beyond that, it is still an open question whether ESG is a rational
approach to achieve the stated goals of its proponents....
Here's our general thinking on the phenomena, from the introduction to January's "The Inherent Conflict Between ESG and Passive Investing" which looked at one of the anomalous facts of the biz:
Over the last couple years we've seen investment shops embrace both passive investing and the Environmental, Social And Governance (ESG) criteria in their marketing material and to a somewhat lesser extent in portfolio construction.
Our typical reader is already way ahead of me on this: going ESG means, by definition, you're not passive and, by definition, going passive means you're not ESG. It's a tautology; it is what it is.
In June 2017 Matt Levine at Bloomberg View had some related thoughts on index construction and the Governance part of ESG that I've been meaning to post but first, just so our position is clear, we have not seen any academic research that overturns the findings of the Marcin Kacperczyk (now Imperial College London) and Harrison Hong (now Columbia) paper "The price of sin: The effects of social norms on markets" which we headlined way back in 2007 as:
Moral Judgment On 'Sin Stocks' Means Higher Returns For Vice-Friendly Investors
Until ESG can be shown to, at minimum, equal broader indexes over time (not just for a quarter or a year as sometimes happens) our chosen approach is to pursue the vice afforded by broader exposure and use the excess returns for whatever do-gooder projects strike one's fancy.
It's a variation on John Wesley's Sermon 50, The Use of Money (1744) which contains the admonition:
So, with Wesley thundering in our ears....
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