What Is ESG?
Environmental, Social & Governance (ESG) is a trend in investing where investors use non-financial factors to screen investment options. At its core, ESG investing attempts to allocate money based on political agendas rather than purely focusing on financial metrics.
Does ESG Investing Work?
ESG funds have not performed as well as many have hoped. In 2019, researchers at the University of Chicago analyzed the Morningstar sustainability ratings of more than 20,000 mutual funds representing over $8 trillion of investor savings. The highest rated funds in terms of sustainability certainly attracted more money than the lowest rated funds – this leads us to believe that a lot of fund managers “advertise” themselves as ESG strategies to attract more dollars. Equally if not more important, none of the high sustainability funds outperformed any of the lowest rated funds.
In addition to this, Columbia University and London School of Economics compared the ESG record of U.S. companies in 147 ESG portfolios and that of U.S. companies in 2,428 non-ESG portfolios. They found that the companies in the ESG portfolios had worse compliance records for both labor and environmental rules. They also found that companies added to ESG portfolios did NOT subsequently improve compliance with labor or environmental regulations – this leads us to believe that the ESG scoring system is flawed.
Cost of ESG Funds/Strategies
According to Morningstar, ESG funds typically have higher fees and are typically more profitable for fund managers than strategies that do not have an ESG screen.
The Texas “Anti-ESG Bill”
During the Texas Legislature’s last legislative session, Governor Abbott signed a bill that was referred to in the media as an “anti-ESG bill”. According to the Governor, the purpose of this bill was to protect the energy industry in Texas from decarbonization metrics that some ESG investment firms use to screen companies. Under this bill, Texas state investment entities, such as state pension funds and public school endowments, are prohibited from investing in companies that boycott the fossil fuel industry. The law also prohibits government entities from entering into contracts unless the company does not and will not boycott energy companies during the term of the contract.
Veto By President Biden
President Biden recently vetoed a bill that sought to strike down a Labor Department rule encouraging company pension plans and 401k providers to use ESG metrics as they invest capital on behalf of clients. You might wonder why this is a big deal? This can become dangerous because company 401k plans may only have a handful of available investment options. As a result, some 401k participants could be forced to utilize these ESG strategies if there are no non-ESG strategies available even if they wanted to allocate their investments with the goal of focusing solely on financial metrics.
Where We Stand
As ESG has gained in popularity, we have had and continue to have doubts. In our humble opinion, the ESG industry remains flawed. It lacks clearly defined standards of measurement and there is little-to-no evidence that it works. In addition to this, the importance of ESG metrics will continue to be dictated by political agendas. Capitalism is an individual sport, not a team sport. ESG is an attempt to make companies look at different issues from one point of view. Community responsibility already exists and the fractured ESG scoring system will impede economic growth while limiting the ability of companies to make decisions in the best interest of the shareholders.
Let me make sure we are clear… Randy and I think everyone should be a good steward. This is especially true when we advise clients as a fiduciary with a stewardship mentality. We also desire to be a good steward of this beautiful world that God created. With that being said, we do not think it is the government’s job to establish rules for the marketplace and a scoring system that can arbitrarily change based on which party holds office in Washington D.C.
In addition, we are NOT saying that you should not invest based on personal conviction or preferences. For example, a client recently told us that she did not want to invest in a certain pharmaceutical company based on how this company treated her parents in a legal battle. Another person may not want to invest in tobacco companies because of the negative health effects. These opinions are understandable and can vary from investor to investor. With that being said, this is dramatically different than having the government (or other 3rd parties) score companies based on their unilateral opinion on a specific issue.
While we are hopeful that this ESG trend fades into a distant memory, we are not sure this will happen any time soon. We will continue to manage client portfolios by making decisions that focus on economic criteria and NOT ESG screening. If you have an individual preference on a company that you would not like to own, please let us know as we are happy to accommodate.
About the Author
Matt Price serves as a Partner and Director for The Price Group of Steward Partners. He resides in Houston with his wife, Emily, their three children and "Fisher" the family golden retriever. Matt studied at the University of Pennsylvania – Wharton School of Business for his Certified Investment Management Analyst (CIMA®) designation after receiving his undergraduate degree from the University of Tennessee - Knoxville. Over the past 11 years, Matt has helped families make high quality, common sense decisions regarding their wealth and their legacy. Matt firmly believes everyone needs a wealth coach!
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The views expressed herein are those of the author and do not necessarily reflect the views of Steward Partners or its affiliates. All opinions are subject to change without notice. Neither the information provided nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Past performance is no guarantee of future results.
The returns on a portfolio consisting primarily of Environmental, Social and Governance (“ESG”) aware/Socially Responsible Investing (“SRI”)/Sustainable investments may be lower or higher than a portfolio that is more diversified or where decisions are based solely on investment considerations. Because ESG/SRI/ Sustainable investments criteria exclude some investments, investors may not be able to take advantage of the same opportunities or market trends as investors that do not use such criteria.
The Price Group is a Wealth Manager with Steward Partners participating in the Steward Discretionary Asset Management program. The Discretionary Asset Management program is an investment advisory program in which the client’s Wealth Manager invests the client’s assets on a discretionary basis in a range of securities. The Asset Management program is described in the applicable Steward Partners ADV Part 2, available at https://adviserinfo.sec.gov/Firm/283004 or from your Wealth Manager.
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