Profitable rebellion: exploring unconventional anti-ESG investments funds
Nicolai Monzon Ladas
Introduction
Widely considered the first mainstream use of the term ESG, in 2004 the United Nations published a report named ‘ Who Cares Wins ’ in which the idea that sustainable development and responsible business practices offer moral good but more importantly also significant economic opportunity on a larger time scale. 1 Almost 2 decades later, this philosophy has clearly resonated with investors worldwide as 85% of investors consider ESG factors in their investments, 2 and 76% of consumers say that they would go as far as to discontinue relationships with companies that treat the environment, employees and communities badly. 3 In quantitative terms, the value of ESG focused exchange-traded funds (ETFs) globally has reached $480bn as of August 2023 – the European market in the lead with $263bn of assets under management (AUM) followed by the US market with $152bn AUM. 4
What are ETFs?
An exchange-traded fund (ETF) is a basket of securities. They typically track a particular index, sector, commodity, or contain other assets. Unlike mutual funds, ETFs can be traded all day on a stock exchange the same way a stock can. ETFs offer low expense ratios and fewer broker commissions than buying stocks individually, therefore optimizing long term gains. A diverse ETF of a wide range of assets is generally considered a safe investment.
Performance of ESG ETFs
Analysing more than 20,000 publicly traded funds in the US market, University of Chicago researchers found that there is a negative correlation between sustainability ratings generated by Morningstar, an investment research firm, and financial performance. 5 For example, searching BlackRock-owned company iShares, the leading ETF provider in the world with $2.5tn AUM, and filtering to only show ESG screened ETFs, the largest 3 (by AUM) have an average loss of 18.7% (-21.44%, -18.75%, -16.17%)
1 ESG abbreviates the environmental, social and governance aspects that, according to some, can and should inform investment decisions. 2 Gartner 2021. The ESG Imperative: 7 Factors for Finance Leaders to Consider. June 10. Accessed July 2023. https://www.gartner.com/smarterwithgartner/the-esg-impera@ve-7-factors-for-finance-leaders-to-consider. 3 PwC. 2021. Beyond compliance: Consumers and employees want business to do more on ESG. June 2. Accessed June 2023. https:// www.pwc.com/us/en/services/consulting/library/consumer-intelligence-series/consumer-and- employee-esg-expectations.html 4 trackinsight. 2023. Invest in ESG ETFs. August 30. Accessed August 30, 2023. https://www.trackinsight.com/en/investing-guides/esg-etfs. 5 Hartzmark, Samuel M. and Sussman, Abigail B. 2019. Do Investors Value Sustainability? A Natural Experiment Examining Ranking and Fund Flows. August 9. Accessed July 2023. https://doi.org/10.1111/jofi.12841
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