Profitable rebellion
for 2022. 6 The largest 3 non-ESG biased iShares ETFs have an average loss of 14.8%. While only a 4% difference, compound losses will add up and would cause significantly worse performance on a larger time scale. (Not only assets managed by BlackRock fell dramatically – Vanguard’s flagship US Stock ESG ETF declined 24% in the same period). 7 ESG funds have not only been performing badly but are not gaining further popularity. Annual ESG fund global inflows fell 75% from $649bn to $157bn from 2021-2022. When looking at the US alone, the situation is no better as, for the first time, in 2022 Q2 and Q4 there was recorded a negative inflow (i.e., an outflow) of money from ESG funds. 8 However, while it is possible investors of ESG funds may accept sacrificing superior financial performance for other nonpecuniary factors, in reality their portfolio companies do not even offer better ESG performance. Researchers from Columbia University and the London School of Economics took the measurable ESG records of US companies in 147 ESG fund portfolios, and that of US companies in 2,418 non-ESG portfolios. This examination showed that the ESG fun ds’ companies in reality had worse compliance records for labour and environmental rules – key social and governance factors. The research also showed that companies added to ESG funds did not subsequently improve these factors. 9 This is not just happening in the US but is also taking place in Europe. A European Corporate Governance Institute paper compared the ESG ratings of companies in funds invested in by 648 institutional investors that signed the UN’s Principles of Responsible Investment (PRI ) and 6,841 institutional investors that did not sign the PRI during 2013-17. The study found no improvement in the ESG ratings of companies held in funds managed by PRI signatories. In addition, the financial performance of the funds managed by PRI signatories was significantly worse, and came with substantially more risk. 10
In addition, research suggests that managers frequently publicly discuss their ESG motives after underperforming data is released, to lead analysts following their companies elsewhere and not release
6 See iShares by BlackRock. 2023. iShares MSCI USA ESG Enhanced UCITS ETF USD (Acc) July Factsheet. August 04. Accessed August 2023. https://www.ishares.com/uk/individual/en/literature/fact-sheet/edmu-ishares- msciusa-esg-enhanced-ucits-e]-fund-fact-sheet-en-gb.pdf; iShares MSCI USA SRI UCITS ETF USD July Factsheet. August 4. Accessed August 2023. https://www.ishares.com/uk/individual/en/literature/fact-sheet/suas- ishares-msci-usa-sri-ucits-eK-fundfact-sheet-en-gb.pdf; iShares MSCI World SRI UCITS ETF EUR July Factsheet. August 4. Accessed August 2023. https://www.ishares.com/uk/individual/en/literature/fact-sheet/susw- isharesmsci-world-sri-ucits-e]-fund-fact-sheet-en-gb.pdf. 7 Yahoo! Finance. 2023. ‘Vanguard ESG U.S. Stock ETF (ESGV) Historical Data.’ August 30. Vanguard ESG U.S. Stock ETF (ESGV) Stock Price, News, Quote & History - Yahoo Finance. 8 Investopedia. 2023. Global Investments in ESG Funds Plunged 76% in 2022. February 8. Accessed August 2023. https://www.investopedia.com/esg-fund-inflows-plunge-2022-7106493. 9 Raghunandan, A. and Rajgopal, S. 2022. Do ESG Funds Make Stakeholder-Friendly Investments? May 7. Accessed August 2023. https://ssrn.com/abstract=3826357. 10 Gibson, R.et al. 2021. Do Responsible Investors Invest Responsibly? May 25. Accessed August 2023. https://ssrn.com/abstract=3525530.
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