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Failure of ESG

Empty Bay Area Street
never miss viewpointsKerby Anderson

Politicians and pundits are starting to take a closer look at ESG, which is a system that evaluates companies and countries with an index of Environmental, Social, and Governance concerns. For example, Senator Tom Cotton has been speaking about his concerns with how the system is deployed.

Andy Kessler, writing in the Wall Street Journal, argues that ESG is a loser and that you pay higher expenses for a fund with similar stocks but worse performance. In fact, he encourages investors to buy stocks of companies with great prospects over the next decade at reasonable prices.

But aren’t the companies and countries with a high ESG score better investments? A professor at the University of Colorado evaluated the system in the Harvard Business Review and made four key points about ESG.

First, ESG funds have underperformed. Second, companies that tout their ESG credentials have worse compliance records for labor and environmental rules. Third, ESG scores of companies that signed the UN Principles of Investment didn’t improve after they signed, and their financial returns were lower for those who signed.

His final point was even more significant. He concluded that often companies publicly embrace ESG as a cover for poor business performance. In other words, when earnings are bad, the company cites its ESG score.

We might also add the political aspects of ESG scores. Two months ago, I wrote that Tesla was removed from the S&P 500 ESG Index, though it used to have the fourth largest weighting in the index. Was it because of some of the “controversial” statements and actions of Elon Musk?

We should be encouraged that more leaders in Congress and in business are taking a second look at ESG.viewpoints new web version

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