Some Thoughts On Environmental, Social & Governance Investing (Esg)

It is nonetheless an opened upwards inquiry whether ESG investing is to a greater extent than than marketing/packaging past times property gatherers.
And beyond that, it is nonetheless an opened upwards inquiry whether ESG is a rational approach to attain the stated goals of its proponents.

Here's our full general thinking on the phenomena, from the introduction to January's "The Inherent Conflict Between ESG together with Passive Investing" which looked at 1 of the anomalous facts of the biz:

Over the concluding twosome years we've seen investment shops comprehend both passive investing together with the Environmental, Social And Governance (ESG) criteria inward their marketing cloth together with to a somewhat lesser extent inward portfolio construction.

Our typical reader is already way ahead of me on this: going ESG means, past times definition, you're non passive and,  past times definition, going passive agency you're non ESG. It's a tautology; it is what it is.

In June 2017 Matt Levine at Bloomberg View had roughly related thoughts on index structure together with the Governance business office of ESG that I've been pregnant to post service but first, simply together with thence our rank is clear, nosotros stimulate got non seen whatsoever academic inquiry that overturns the findings of the Marcin Kacperczyk (now Imperial College London) and  Harrison Hong (now Columbia) newspaper "The cost of sin: The effects of social norms on markets" which nosotros headlined way dorsum inward 2007 as:
Moral Judgment On 'Sin Stocks' Means Higher Returns For Vice-Friendly Investors

Until ESG tin endure shown to, at minimum, equal broader indexes over fourth dimension (not simply for a quarter or a yr every bit sometimes happens) our chosen approach is to pursue the vice afforded past times broader exposure together with role 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:

"Earn all yous can, Save all yous can, Give all yous can" 

So, alongside Wesley thundering inward our ears, here's business office of Mr. Levine's June 20, 2017 Money Stuff slice "Bank Relationships together with Index Rules Also Bancor, leaky brokers, Martin Shkreli, slot machines together with unicorns.":

Which leads us to an FT Alphaville post service past times Colby Smith, Oct 24, that addresses the highlighted chip inward the intro above:

Moral investments aren't outperforming

This week, the world's largest property managing director went all inward on ESG — a laid of environmental, social together with governance investment criteria that has late swept through the marketing departments of much of the fiscal industry. BlackRock announced that it volition launch a attain of ESG-focused ETFs inward the United States of America of America together with Europe that volition enable investors "to align their investments alongside their values together with long-term fiscal objectives."

To justify the move, primary executive Larry Fink recited a favourite claim of recent devotees, including Bank of America Merrill Lynch together with Barclays: investors volition endure improve off if they invest sustainably. As he told the FT:

We are going to run into evidence over the long term that sustainable investing is going to endure at to the lowest degree equivalent to nub investments. I believe personally it volition endure higher.

Unfortunately for Fink, novel findings produce non fully back upwards this claim.

According to analysis past times Renaissance Capital, the human relationship betwixt country-level ESG scores together with fiscal functioning is weak at best together with at worst, non-existent, at to the lowest degree historically.
To calculate the ESG scores, Renaissance Capital's Charles Robertson measured diverse attributes across the environment, social together with governance spectrum.

For the "social" component, he gives a 33 per cent weighting to education, life expectancy together with sex equality, together with add together a 0-10 per cent bonus for democratisation. For "governance," he tracks a diverseness of surveys, including the World Bank's ease of doing employment organisation together with Transparency International's Corruption Perceptions Index. On the "environment" front, Robertson factors inward carbon emissions together with H2O pollution to varying degrees. Demographics, income inequality together with consumer protection are non included.

Now onto the "awkward" part, every bit Robertson puts it (emphasis ours):

We would honey to recall that investing inward draw alongside ESG principles would both experience proficient together with demo upwards inward marketplace rank pricing. Sadly, nosotros detect virtually null correlation betwixt sovereign bond pricing (using credit default swaps) together with ESG scores (obviously later adjusting for per capita GDP) together with non much inward the equity markets either. Indeed, the best-performing DMs together with EMs inward 2018 stimulate got the worst ESG scores."

Here's 1 of Robertson's charts showing stock marketplace rank returns, every bit measured past times the annualised total provide of the MSCI index, against changes inward the ESG scores:...AQR Capital's Cliff Asness on Environmental/Social/Governance (ESG) Investing 
The footnotes are pretty interesting together with a possible threat to Matt Levine's hitherto unchallenged fn dominance.
 
May 2017 
Is Environmental/Social/Governance (ESG) Investing Integration a Fad, or Does It Have Alpha Potential?

August 2014 
Only Now Is the Pax World Global Environmental Markets Fund Again Buying Renewable-Energy Stocks 
It's simply been easier together with less risky to brand the wide market, every bit opposed to sector, bets over the concluding few years. 
March 2016
"SHE Power: State Street Launches Gender Diversity ETF"
September 2017
Does An ESG Mandate Mean You Can't Invest In Electric Car Companies Using Cobalt Containing Batteries? 
November 2017 
Hey Mister Environmental, Social, Governance Investor: What the Hell Are You Doing In Bitcoin?
March 2018
Is It Ethical To Deal With Facebook? "Facebook Advertisers Start Pulling Out" (FB)

(in Edward G. Robinson Voice) Where's your ESG now, see?* 

In add-on to BlackRock, Vanguard also staked their claim this calendar month alongside a twosome novel ETFs which promptly got caught inward the downdraft together with fifty-fifty underperformed the underperforming indices 

From that Apr 2007 post service (hey, we're cipher if non patient):

Moral Judgment On 'Sin Stocks' Means Higher Returns For Vice-Friendly Investors

That's the headline of a press unloosen from the University of British Columbia's Sauder School of Business announcing the unloosen of a draft newspaper past times the school's Prof. Marcin Kacperczyk together with Princeton Economics Prof. Harrison Hong.

Prof. Hong lists his inquiry interests as:

 "Asset pricing alongside less-than-fully-rational investors; differences of opinion, short-sales constraints together with property prices; social interaction together with fiscal markets; career concerns, biased forecasts together with safety analysts; organization, functioning together with usual funds; property pricing alongside asymmetric data together with other marketplace rank imperfections."

Hey! Mine too!