The rub of the green

Outperformance vs the broad market and meaningful asset commitments have entered the ESG arena, fueling long-term optimism that ESG investing is here now, and it will be for the long term.


The below is a lightly updated version of an article published in the May edition of sister publication, Portfolio Adviser, which highlights some data that has emerged around ESG investing that should strike a chord for investors looking to the future of the sector

Dear Readers,

Here in the States, the government has reported the latest unemployment claims, and more than 20 million people continue receiving unemployment benefits. That number is jarring, and one might anticipate it would drive investors into hiding until the coast is clear.

However, investors remain focused on managing the situation for themselves and their clients. The empathetic observer rightly shakes their head at the … recovery in equity markets, but the professionals do need to keep their eyes forward, and so today I am going to share some data that has emerged around ESG investing that strikes a chord for investors looking to the future of the sector.

I will begin with the confession that I was an avid – I dare say recalcitrant – ESG skeptic for most of the last 20 years. I can’t count the number of ‘new investing’ pitches I received from 1997 to 2018 proclaiming the discovery of the secret sauce of investing that could do good while doing well. There was one persistent issue with these pitches – no matter the label you applied to it – faith-based, socially responsible, principled investing – the concepts perpetually pitched to me lacked two key components of successful investing: assets and performance.

The asset story changed in 2019 and, over the past year and change, we have seen assets begin to gather behind the ideas, which opened up my eyes. Over a series of meetings, I saw real assets being committed. And yes, Blackrock’s $7 trillion (£5.7 trillion) in support did play a ‘minor’ role in helping dawn break on my marble head.

Enter performance

Now, behind that, we are seeing performance. As InvestmentNews’ own Jeff Benjamin reported recently, funds with the highest ESG ratings outperformed funds across the board. For the ESG purist, funds with higher Morningstar globe ratings outstripped lower-rated ESG funds.

But the rubber really meets the road when you see these highly-rated funds outperformed the broad market too! Per the report, global large-cap stock funds that received ‘5 globes’ from Morningstar outperformed the S&P 500 by 6 percentage points. (A note from sceptical me: globes? Really?)

Now that assets and performance are in place, the next leg in the development of ESG is the ancillary service, where the folks that begin to commit to the sector can turn to get independent insights on products targeting the space. And this really matters in ESG, because the sector, as young as it is, has been beset with greenwashing.

For those unfamiliar with the term, ‘greenwashing’ is the label applied to funds that claim to deliver ESG investing – but do so in name only. A hysterical example of this came up in a conference in early March, when we were last able to conference in public, when a manager shared that a prospectus claimed the investments were carbon-free, and a major oil was a top 10 holding. Thus, the independent agencies need to step in. Refinitiv Lipper does this on a pure quant basis, and Morningstar doubled down on its commitment to the sector recently, when it acquired 100% of Sustainalytics.

So what does all this mean, other than I was right for 18 years? ESG is here now, and it will be here for the long term. I am more than confident this won’t be the last time you hear from me on the topic.


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