Virtue Signaling With Investment Capital

A new study indicates that the recent rush into ESG investment vehicles may do more to gain investors’ approval as a virtue posturers than to increase their net worth. It shows that ESG funds tend to underperform in comparison with other investment funds run by the same managers, yet they are able to charge higher fees for their ESG products. If investors are not paying more for less in order to pass muster on the political correctness front, then for what ? In addition, the study shows that ESG mutual funds tend to invest in firms whose track records in regards to compliance with labor and environmental laws are actually worse than the norm. The companies were worse both in terms of their nominal output of carbon emissions, as well their emissions intensity (the amount of carbon emitted in order to generate a dollar of revenue). The new influx of capital into them from ESG funds appears to be providing no perceptible impetus for them to clean up their processes nor to improve compliance.

The paper by Aneesh Raghunandan of the London School of Economics and Shivaram Rajgopal of Columbia Business School also indicates that the companies that ESG funds invest into seem to politically align themselves to a greater degree than what is typical. They spend more on lobbying politicians and more regularly receive richer government subsidies. Little wonder they also service the same green agenda that governments are charging hard at while eroding value – albeit much less destructively. BlackRock raised around $1.25 billion for its U.S. Carbon Transition Readiness ETF this month. But since its top 5 holdings are Apple, Microsoft Corp, Amazon, Alphabet, and Facebook, a return series very similar to it can be gained at lower cost simply by buying either the Nasdaq, a tech ETF, or those 5 stocks.

Altogether, U.S. exchange-traded ESG portfolios accepted $14.8 billion in new money in 2021 Q1 according to ETFGI, a research firm in London, and have taken-in over half their present asset level of $82.6 billion since the start of 2020, so the inflow momentum has built substantially. How durable the trend will remain likely depends on factors unrelated to pure performance and thus beyond the scope of the paper. Factors such as the variety of ways government may make it easier for firms to operate as long as they continue pursuing their ESG policies regardless of how facile and specious they may be, nor how ineffective they are at making environmental impacts that would help to save humankind from the climate doom that for over two decades has somehow always managed to persist in looming just 8-15 years out into our future.