ESG = Eluding Substantial Gains?

This investment strategy did not age well

Last June, in the depressing depths of the pandemic, my colleague Joe and I wrote about how the triumphant talk that funds making investments on the basis of ESG factors had shown they could not just survive but thrive in a crisis may have been premature. The reason, as we pointed out, was that every crisis is different and a crisis that shut down global economic activity and forced those who could work from home to use big tech products would play to ESG’s strengths, while a different type of crisis might not.

Fast forward to the present day, when we are facing an energy, if not crisis at least challenge, and fossil fuel stocks (the bête noire of ESG funds) are booming, leaving ESG investors on the sidelines of a major increase in value. To be sure, this stock increase isn’t a good thing in that it reflects a systemic lack of power production capacity that risks harming the global economy and putting lives at risk as winter in the Northern Hemisphere begins. In short, a different sort of predicament and one ESG is not thriving in like before.

Does this mean that ESG investing failed and should be relegated to the dustbin of history? I have no idea. This could be a blip and ESG could turn out to be a great idea, or not. What this situation does show however are the risks of over-extrapolating from limited data and assuming that the future will match your policy preferences. Just because a strategy (whether ESG or anything else) does well under one set of circumstances doesn’t mean it is future proof. Humility and sobriety are virtues for a reason, and this goes double if you are controlling other people’s money.

P.S. It bears remembering that “ESG” encompasses multiple unrelated issues and some may have more generally applicable benefit to corporate returns than others.