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ESG funds underperformed broader markets in 2022 (2023)
| Environmental, social, and corporate governance |
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| • What is ESG? • Enacted ESG legislation • Arguments for and against ESG • Opposition to ESG • Federal ESG rules • ESG legislation tracker • Economy and Society: Ballotpedia's weekly ESG newsletter |
Equities markets had a rough 2022, but ESG investments had it even worse, generally underperforming the broader markets by a significant margin:
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Funds linked to environmental, social and governance principles are by definition supposed to minimize risks tied to those three factors. In 2022, the approach did little to help protect investors from the brutal slide in the financial markets. The 10 largest ESG funds by assets have all posted double-digit losses, with eight of them falling even more than the S&P 500’s 14.8% decline. The laggards include BlackRock Inc.’s $20.7 billion iShares ESG Aware MSCI USA exchange-traded fund (ESGU) and Vanguard Group’s $5.9 billion ESG US Stock ETF (ESGV). The $6 billion Brown Advisory Sustainable Growth Fund (BAFWX) was the worst performer of the bunch, having slumped 28.1% this year as of the close of business on Dec. 5…. The performance of the 10 largest funds compares with the average 12% decline of ESG-labeled stock funds with more than $500 million of assets so far in 2022, according to data compiled by Bloomberg. Despite the losses, a paper released this month by the National Bureau of Economic Research said that investors are willing to be charged “higher fees for ESG-oriented index funds in exchange for their financial and non-financial benefits.”[1] |
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Rupert Darwall of the RealClear Foundation argues that this underperformance is the natural progression of the ESG investment story. As a result, Darwall says ESG as an investment strategy is losing or has lost much of its credibility:
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The year 2022 brings an end to an era of illusions: a year that saw the end of the post–Cold War era and the return of geopolitics; the first energy crisis of the enforced energy transition to net zero; and the year that brought environmental, social, and governance (ESG) investing down to earth with a thump—for the year to date, BlackRock’s ESG Screened S&P 500 ETF lost 22.2% of its value, and the S&P 500 Energy Sector Index rose 54.0%. The three are linked. By restricting investment in production of oil and gas by Western producers, ESG increases the market power of non-Western producers, thereby enabling Putin’s weaponization of energy supplies. Net zero—the holy grail of ESG—has turned out to be Russia’s most potent ally. It wasn’t only a bad year for ESG on the stock market. Earlier this month, Vanguard announced that it was quitting Glasgow Financial Alliance for Net Zero (NZAM), set up by former governor of the Bank of England Mark Carney a little over a year ago. “We have decided to withdraw from NZAM so that we can provide the clarity our investors desire about the role of index funds and about how we think about material risks, including climate-related risks,” the world’s second-largest asset manager said. Two months ago, Alex Edmans, coauthor of the latest edition of the standard textbook on the principles of corporate finance and professor of finance at the London Business School, published a paper titled “The End of ESG”—without a question mark. Edmans criticizes what has become the primary justification for ESG: the claim that business can generate higher returns for investors by tackling climate change. Since governments are democratically elected by a country’s citizens, they are best placed to address externalities, whereas investors disproportionately represent the elites. “If ESG is pursued for its externalities, companies and investors should be very clear that it may be at the expense of value,” Edmans says. October also saw the publication of Terrence Keeley’s Sustainable, where the former BlackRock senior executive penned what amounts to a requiem for ESG. Rather than “doing well by doing good,” the logic of Keeley’s case, as I reviewed for RealClear Books, is that investors in conventional ESG investment products are likely to end up not doing very well and leave investors feeling good, not doing good…. According to ESG doctrine, there are two types of climate financial risk—physical risk and transition risk—and it’s straightforward to demonstrate that both are spurious…. Although the disintegration of ESG as an investment strategy became unmistakable in 2022, its existence as a political doctrine will continue until it is challenged and defeated politically.[1] |
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See also
- Environmental, social, and corporate governance (ESG)
- Economy and Society: Ballotpedia's ESG newsletter
External links
Footnotes
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