Well duh. It's like the old joke "What do they call Chinese food in China?" "Food."
If ESG investing had quantifiable advantages everyone would do it and it would just be called investing.
Regarding Vanguard, after the January run-up in risk assets I think I saw they were over $8 trillion in AUM.
From The Wall Street Journal, February 26:
Vanguard’s Tim Buckley is having a Copernican moment. Like the famous Renaissance polymath who challenged conventional wisdom about celestial movement, the 54-year-old CEO is challenging the asset-management industry’s environmental, social and governance orthodoxy.
“Our research indicates that ESG investing does not have any advantage over broad-based investing,” Mr. Buckley said in a recent interview with the Financial Times. Matching word to deed, his comments came after he had withdrawn his firm from the $59 trillion Net Zero Asset Managers initiative, an organization that is part of the $150 trillion United Nations-affiliated Glasgow Financial Alliance for Net Zero. Both alliances are committed to restricting their investments over time to companies that are compliant with the Paris Agreement’s objective of net-zero greenhouse gas emissions by 2050. Mr. Buckley claims the financial world, swept up in climate-change fervor, can’t make such commitments without reneging on its fiduciary duties.
Mr. Buckley’s assertions would be innocuous if he were a small hedge-fund manager or a climate-change denier. He is neither. Depending on how and when you measure, Vanguard is the largest or second-largest asset manager in the world. Pulling his firm out of the world’s largest association of financial institutions dedicated to net-zero goals should have seismic implications. What is it that Mr. Buckley knows that so many others don’t?
For one thing, he understands that it’s difficult for active managers to beat broad indexes, as most ESG funds promise. “In investing, you get what you don’t pay for,” as Vanguard founder John C. Bogle observed. “Intelligent investors will use low-cost index funds to build a diversified portfolio, . . . and they won’t be foolish enough to think that they can consistently outsmart the market.”
Mr. Buckley effectively claims that ESG managers are playing the fool and taking their clients’ money with them. Fewer than 1 in 7 active equity managers outperform the broad market in any five-year period. Over the past five years, not one relied exclusively on a net-zero investment methodology. Outperforming the market is even more difficult over longer time horizons—only 1 in 10 over 10 years, and 1 in 20 over 20 years, ever do....
....MUCH MORE
On the last couple points, the introduction to January 2018'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....
You know the drill: 'search blog' box, upper lef.
And related:
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....
Dec 2020
Knowledge@Wharton:: "Why ESG Investors Are Happy to Settle for Lower Returns"
March 2021Warning: 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....
"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"
Next up, Fracking For Uranium
I think a couple folks at the Sierra Club and Friends of the Earth just had strokes.
