Let’s begin by asking a very basic question: does ESG operate in the way that it claims to? Recent academic analyses of this topic have raised major doubts about this. In their Review of Accounting paper “Do ESG Funds Make Stakeholder-Friendly Investments?” for example, Aneesh Raghunandan and Shivaram Rajgopal asked whether “ESG mutual funds actually invest in firms that have stakeholder-friendly track records?”
Based on a large sampling of Morningstar-identified American ESG mutual funds from 2010 to 2018, Raghunandan and Rajgopal determined “that these funds hold portfolio firms with worse track records for compliance with labor and environmental laws, relative to portfolio firms held by non-ESG funds managed by the same financial institutions in the same years.” As if that is not enough, Raghunandan and Rajgopal conclude that “ESG funds appear to underperform financially relative to other funds within the same asset manager and year, and to charge higher fees.” In short, not only have such funds failed to deliver on many of their ESG goals; they also cost more and provide less by way of financial return.
A similar picture of ineffectiveness emerges when we take a closer look at the composition of ESG funds. In his analysis of the makeup of ESG funds managed by some major investment houses, the Wall Street Journal’s Andy Kessler found that their composition differed only marginally from non-ESG-labeled funds. He discovered, for instance, that BlackRock’s ESG Aware MSCI USA EFT had “almost the same top holdings as its S&P 500 EFT.” Nevertheless, Kessler noted, the ESG-labelled fund cost 5 times more by way of fees. If this was the subtext to Elon Musk’s tweet proclaiming that ESG “is a scam,” he may have had a point.
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