ESG DATA: DAZED AND CONFUSED
- Case study of one ESG data set from a well-known provider
- Highly ranked ESG stocks do not have better fundamentals
- Stocks with the worst rating outperformed over the past 12 months
ESG VS LOW CARBON INVESTING
- ESG and Low Carbon portfolios feature significant, but different sector & country biases
- Investors should expect large tracking errors in some ETFs
- Some products contain stocks that are likely unexpected and undesired
HOW EXPENSIVE ARE ESG STOCKS?
- Highly ranked ESG stocks trade at higher valuation multiples than the stock market
- However, the difference in multiples is minor and far less than extreme than for Growth stocks
- ESG ETFs generated lower returns than the stock market, but were also less volatile
WHY PENSION FUNDS & MILLENNIALS SHOULD AVOID ESG
- ESG ETFs underperformed the stock market since 2005
- Likely explained by higher fees, a constrained stock universe, and sector bets
- Financially-impaired investors like public pension funds and Millennials should avoid ESG investing
ESG: WHAT’S UNDER THE HOOD?
- The ESG factor generated positive returns since 2011
- Strong sector biases (long tech & short discretionary) explain the performance
- Residual returns from ESG investing are essentially zero
CAN VALUE INVESTORS DO GOOD?
- ESG factors underperformed the Value factor and market since 2009
- Integrating ESG in Value investing decreased returns, but increased risk-return ratios
- Residual ESG factors are likely to generate negative returns given the focus on stakeholders, not shareholders
ESG INVESTING: TOO GOOD TO BE TRUE?
- ESG factors generated positive excess returns since 2009
- Show positive exposure to Low Volatility & Quality and negative exposure to Value & Size
- Factor exposure is likely structural and not temporary