In this somewhat clickbaity video Ben Felix argues that ESG investing does not have any effect. And if it had, it would be the opposite of what was intended:
From my point of view there are 2 things:
There is opportunistic capital trying to maximize returns acting as a buffer. High ESG companies don’t become less profitable (by having a higher and higher price), because opportunistic capital is leaving for low ESG companies (which therefore also do not get more profitable). This arbitrage can work even after opportunistic capital has reduced their positions to zero, because they can still go short (leveraged if profitable).
High ESG investing is supposed to work by depriving the worst companies of capital. If it worked, this increased stress would prevent those companies to invest in reducing their damaging impact. If they could get capital by becoming high ESG companies that would of course create pressure to do so, but likely their whole industry is inherently low ESG.
To bypass those two points: Wouldn’t it be better to invest in those low ESG companies to get a seat on the board and continuously push for all the low cost high impact measures (and have the other shareholders help paying)? I don’t know, but maybe:
Install some filters
Disseminate safety guidance to workers
Buy from higher ESG suppliers first (potentially has the same problem)
Use your measures as proof of feasibility to demand regulations forcing your competitors to do the same.
Many of those measures could be somewhat difficult / costly to roll back, so your capital can potentiate its effect by hopping between companies.
A single smalltime investor isn’t enough, but there must be funds? I just can’t find them. Probably using the wrong search terms.
I’ve mentioned this before on some other thread. Tangible ESG effects are:
fund managers can charge higher fees for funds with an ESG label* on it and buyers of ESG funds are willing to pay for it for a better conscience** or whatever their motivation is.
I am observing this first hand.
ESG concious companies employ financial “engineers” and consult investment bankers who get busy by spinning out ESG score lowering parts of companies to keep the remaining company included in indexes and ESG conscious funds.
The spun out low ESG score companies of course continue to exist and do business as before, but without any ambition of being scooped up by ESG minded investors, including funds and indices.***
If this sounds sarcastic, it probably is. In my personal opinion, it’s very close to the truth.
Don’t get me wrong, though: the intention of mandating ESG sounds great, but how to implement?
In Charlie Munger’s words: “Show me the incentives, and I’ll show you the outcome.”
* The underlying issue is a lack of standardization. The asset managers “doing ESG” do need to have some methodology how they measure ESG (to avoid being called out as greenwashers), but the nature of the “ESG label” is defined by the asset manager.
If the defined approach is data driven, the entire chain in the finance industry participates in the higher fees paid by the customer: the ESG data providers charge the asset managers for their data, etc, etc. Standardizing ESG, however, would only adapt the incentives … and outcomes would adapt accordingly.
** This was already a financial instrument used e.g. by the catholic church via Ablasshandel.
*** I can even see the original company’s treasury investing part of their cash into the split off “ESG dirty” company. Depending on sizing and disclosure requirements this wouldn’t make it into publicly stated filings and would not transpire into negatively affecting the ESG score of the original company.
This essentially happened with a company I know pretty well. And after having been spun out, the stock returned more than double the old parent company in a year. First it dropped quite a bit after being thrown out by all the ESG funds, but quickly regained it.
ESG is one of the most usless and arbitrary things there is in investing imo. It’s also way more popular in europe than in the US.
I’d go further : ESG helped me a lot as a stock picker, just as the total opposite way of what it was meant to do initially (who said “law of unintended consequences”?)
My favorite example is coal.
ESG has labeled coal dirty and uninvestable, and starved the coal mining industry of capital over the last 15 years. Many coal miners could not refinance their debt and went bankrupt because no banker wanted to be seen lending money to such a dirty industry.
As a result, the coal mining supply shrank significantly until only the players with the strongest balance sheet would remain.
What ESG forgot is that coal is not only needed for thermal uses. Even more importantly, you need coal to make steal and cement (this kind of coal is called metallurgical coal, or met coal). In other words, if you want to get your civilization going, you need coal, and the demand is not going to disappear the way supply did.
As a result, the met coal industry has been a great performer over the last years. One of them, Alpha Metallurgical Resources ($AMR) must be the best performing stock in America since 2020 (Stock price in March 2020 : $2.50 - stock price now: $340 (a cool 136x in 4 years). Too bad I only realized it when the stock was already at $150.
Long story short: ESG has the opposite effect of what it set out to do, and looking for industries that have been starved out of capital for non-economical factors like ESG is often a good playground to achieve superior returns.
It’s a simple fact of capitalism, seen in China, that modernising production methods to improve efficiency and productivity is inherently cleaner than older methods. Still not ESG.
I am not a stockpicker but cringe whenever I see ESG similar to what @Julianek said. My last employer wanted to get an ESG label which meant wasting tons of time and money running surveys asking us where we got our lunch, how we made it to the office, if our kitchen utensils are made of metal or not and other such bullshit. Also a strong drive towards banging us on the head about diversity and inclusion, full of toxic positivity. I almost considered flagging that as an introvert all these ankylotic smiles were distressful for me. Where’s my diversity and inclusion?!
Statistically I have 40 odd years left on this planet, 20 decent to good ones while there’s still lead in my pencil, other my kids I have minimal care about much else.
I found VOTE ETF by TCW which by composition should have the same return as any other S&P 500 ETF. They invest according to the index but cast votes according to their policy (which can be found in the documents section).
They had some increased tracking difference at the beginning, but that seems to be fixed now.
The suggested strategy, to hold standard funds and donate the performance difference (from e.g., fees), seems sound to me. But something like VOTE is what we are looking for here. Better would be something concentrated like VICE ETF but with ESG voting policies.
This politically right US interest group has made a ranking of “extremist” ESG voting for the biggest fund houses:
Regardless of personal political leaning, I’m more and more convinced, that buying up everything including private equity, and shifting it by voting for your preferred policy is the way to go. Filtering doesn’t work.
Such non-governmental political pressure has started to cause big fund houses to extend proxy voting to retail investors (so they themselves can get out of the line of fire). See for example this Morningstar article.
To expand on my previous idea of a concentrated ESG VICE ETF. Maybe a fund could also rapidly cycle through shares, buying and borrowing to get large stakes to tip votes, maximizing voting power per capital. If the ESG decisions are actually detrimental to the share price, borrowing would prevent losses. Seems like an impact strategy actually orthogonal to risk-and-return.
From Bloomberg’s Senior ETF Analyst Eric Balchunas:
ESG ETFs Victims of Changing Climate with Net-Zero Flows… ESG ETFs hold US stocks and somehow couldn’t take in cash last year = BAD SIGN. Their market share is down to 1% and will likely stay below that number forever. While a few funds will thrive, the category as whole will go down as one of the biggest disappointments of Wall St history. New from me today: https://blinks.bloomberg.com/news/stories/SQ8L4RT1UM0W
Somehow $VOO is outdoing itself this year w/ +$13b in 11 days to start 2025. That’s more than 99.7% of ETFs took in ALL OF LAST YEAR. It’s also 25% of all net flows and a mere $20b away from dethroning $SPY. If it keeps up this pace it will take in about $280b this year.
I read something about this ETF a few days, may have been here, may have been elsewhere, but I suppose this Azoria 500 Meritocracy ETF, which will trade under the ticker symbol SPXM, and/or American Conservative Values ETF ACVF could be the “opposite” of high ESG, well especially the S bit.
I think the bit that Europe is enforcing is not ESG but net zero goals (then the finance industry decides to bundles that into ESG, but I don’t think they have to).
To be fair, it’s a pragmatic solution to reduce plastic littering no?
(remember that every bit of plastic you see in the street will probably end up going through rain collection system and flow to rivers etc. becoming a forever chemical polluting the environment, unlike waste water, rain collection doesn’t usually get treated/filtered)
You know (well, you don’t) whenever I go back to Greece and get a coke zero (1 in 8 coke bottles belong to Buffett, so by drinking coke I am actually supporting my BRK.B investment) I always make a show of ripping the cap off and loudly saying “What’s this EU crap?”.
Sounds like your usual Wall Street hyperbolic prediction with potentially a bit of ideology thrown in. I wouldn’t listen. I wouldn’t invest in ESG funds, but I wouldn’t listen to this Mr Balchunas either.
Even my professional portfolio manager colleagues admit that – ESG – is something they have to do for political reasons. They don’t believe in it. But it has the nice side effect – for asset managers – that additional fees can be charged for the believers who want to buy this.
Of course it is!
It is just a parable that in other places innovation takes place by landing heavy-duty rockets for re-use (not that I endorce the person behind this in any way; in fact, quite the opposite) while we in Europe have landed the incredible coup of keeping the lid (mostly) attached to a plastic bottle to reduce plastic littering.
You shouldn’t conclude from that to not do the latter, but if that’s the pinnacle of innovation here … well, I hope there’s more in store on the old continent than keeping plastic lids on the bottle.
I think that’s what George Soros refers to as reflexifity. You could totally game this by drinking … say, half of the world-wide Coca-Cola supply to drive up the stock price.
(please give me a heads-up when you’re about to implement this strategy)
Perhaps.
In the case of ESG funds, they have already suffered from outflows. If you think this recovers, I would take the other side of that bet.
That’s a really weird argument, is anyone claiming that it’s the pinnacle of innovation?
It’s not an either/or, people can do pragmatic things that improve the situation…
If you want to take random examples, there’s only one company in the world that enable modern computing and it’s a dutch company (ASML). They have a monopoly on modern lithography, it’s definitely on par with space x wrt innovation (they print with 4 atom accuracy).
One space x rocket is cheap compared to one EUV machine (380M USD each machine, probably the most expensive human machine ever factory built, they sell 100 per year to TSMC).
That’s my point, afaik only (parts of) the E is being required (basically the stuff steering towards net zero). I guess fund providers decide to add bunch of stuff on top.
(edit: and that’s exactly what I already said in the rest of the quote that wasn’t included…)
I wouldn’t bet on an ESG recovery (I wouldn’t bet on them keeping underperforming either, I’m mostly agnostical but don’t care for paying more myself for a system corporate structures have learned to game).
I would bet that I can find bigger disappointments in Wall Street history. Balchunas seems to have forgotten his past in order to inflate the importance of his present, much like Wall Street keeps selling us common market fluctuations as “the biggest soaring/drop since December 2024!”
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