ESG Takes A Hit

[Moonbox]

Any study starting back in 2001 is pretty worthless in the context of ESG, which only really started taking off in the last ~10 years or so. 

Even then, it's all apples to oranges unless you're including risk-adjusted returns when it comes to pension plans.  If the volatility and risk index are the same, and ESG still underperform, then there's something there.  

[suds]

2 hours ago, Moonbox said:

Any study starting back in 2001 is pretty worthless in the context of ESG, which only really started taking off in the last ~10 years or so. 

Even then, it's all apples to oranges unless you're including risk-adjusted returns when it comes to pension plans.  If the volatility and risk index are the same, and ESG still underperform, then there's something there.  

The PDF i was referring to shows a (2020) chart comparing average net returns of Vanguard mutual funds to comparable ESG mutual funds over half a dozen asset classes for 1, 5, and 10 years. Vanguard wins hands down except for the short term bond funds. However the expense ratios of the ESG funds are multiple times higher which whittles the difference down by about 1/2 I'd say.  I tried to post the chart here with little success.

Edited March 7, 2023 by suds

[Moonbox]

23 minutes ago, suds said:

The PDF i was referring to shows a (2020) chart comparing average net returns of Vanguard mutual funds to comparable ESG mutual funds over half a dozen asset classes for 1, 5, and 10 years. Vanguard wins hands down except for the short term bond funds.

Vanguard's a low-cost Index and ETF company, passively investing according to their benchmarks at massive scale.  This unfavorable comparison would probably apply to the majority of mutual funds (ESG or not).  

23 minutes ago, suds said:

However the expense ratios of the ESG funds are multiple times higher which whittles the difference down by about 1/2 I'd say.  I tried to post the chart here with little success.

  \

There are all sorts of things wrong with this chart. 

1)  It's not really clear what the ESG is even comprised of.  Who is it?  How many? 

2) The scales aren't even comparable.  You have average AUM for US mid-cap ESGs at $1.3B, vs Vanguard's massive $106B fund.  Right there you're faced with a pretty big apples to oranges problem - cherry picking in such a brazen way that it makes you question the authors' objectivity.  

3) Those fees aren't telling the whole story.  Vanguard funds are generally cheap and low cost, and mostly passively managed, but 0.92 expense ratio for small-scale ESG mid-cap funds doesn't sound right.  I suspect they'd be closer to double that cost, but much of how this study was done is confusing to me.  

 

[suds]

46 minutes ago, Moonbox said:

Vanguard's a low-cost Index and ETF company, passively investing according to their benchmarks at massive scale.  This unfavorable comparison would probably apply to the majority of mutual funds (ESG or not).  

  \

There are all sorts of things wrong with this chart. 

1)  It's not really clear what the ESG is even comprised of.  Who is it?  How many? 

2) The scales aren't even comparable.  You have average AUM for US mid-cap ESGs at $1.3B, vs Vanguard's massive $106B fund.  Right there you're faced with a pretty big apples to oranges problem - cherry picking in such a brazen way that it makes you question the authors' objectivity.  

3) Those fees aren't telling the whole story.  Vanguard funds are generally cheap and low cost, and mostly passively managed, but 0.92 expense ratio for small-scale ESG mid-cap funds doesn't sound right.  I suspect they'd be closer to double that cost, but much of how this study was done is confusing to me.  

 

The notes (under the chart) claim information used comes from Vanguard, and Bloomberg's ESG data service. I admit they're comparing apples to oranges but is there any better way of doing it? The proponents of ESG claim it will create higher returns. Shouldn't it be up to them to provide evidence to the contrary? I'm also reading in the notes at the end of the study that ERISA requires the fiduciary to act solely in the interests of the (plan) participants and beneficiaries for the exclusive purpose of providing benefits to them. Which is one of the purposes of this study. Is that why the proponents are making these (as far as I can tell) unproven claims? To get around ERISA? ERISA (as I understand it) is a federal act and doesn't apply to state or local pensions.

[Moonbox]

8 hours ago, suds said:

 I admit they're comparing apples to oranges but is there any better way of doing it?

The better way of doing it would be to use comparable actively-managed non-ESG funds and contrast their average returns to the average returns of the ESGs. 

You can't really compare Vanguard Index Funds or ETFs to the vast majority of mutual funds.  Beating the index is something that the vast majority of mutual funds don't do in the first place. 

The methodology of this study looks like it set out to show what the authors wanted to show, rather than information that's useful.  TDLR here is that they set a higher threshold for comparison than the average non-ESG fund would be expected to meet, and it predictably fell short.  

8 hours ago, suds said:

The proponents of ESG claim it will create higher returns.

They're still fairly new, especially for mainstream adoption.  Up until probably 7-8 years ago, nobody but the most granola hippies cared about ESG.  

As for what they claim, that's marketing.  Every fund out there makes claims about their superior methodology and how they'll deliver a better return profile.  What they rarely do is get specific.  They don't claim they're going to beat the index.  They don't claim they're going beat anyone or anything in particular.  Even the low-cost ETF's (look at the Wealth Simple or Quest-Trade commercials), where they claim you can retire "Up to 30% wealthier", whatever the hell that's supposed to mean.  

8 hours ago, suds said:

Which is one of the purposes of this study. Is that why the proponents are making these (as far as I can tell) unproven claims? To get around ERISA? ERISA (as I understand it) is a federal act and doesn't apply to state or local pensions.

I suspect this is more politics than anything.  If tax dollars are going to pension plans, there are enough hippies out there that are going to angry their plans are going to Raytheon or BP that the administrators have a mandate to avoid them.  That's not ESG necessarily. 

[suds]

As it stands now, the first priority of those managing investments in federal pension plans is to act solely in the best interests of those participants and beneficiaries of the plan. ESG will change everything, in fact do the exact opposite. The new priority will not be the best interests of participants and beneficiaries but the best interests of the non-participants and the non-beneficiaries. This in my opinion could be a good thing or it could be a bad thing. As with most 'things' the devil is in the details.