Wills, Trusts & Estates Prof Blog

Editor: Gerry W. Beyer
Texas Tech Univ. School of Law

Monday, July 13, 2020

Why ESG investing makes fund matters more money

ESGBy actually knowing their supply chains, do-gooding companies have made better returns. 

In recent years, some investors have felt irritated by the reverent tone of the environment, social and governance sector they have joked that the ESG acronym should stand for "eye-roll, sneer and groan."

Among the many long-held assumptions turned upside down by COVID-19 is the notion held by many investors that ESG investing implies lower returns. Instead, 2020 suggests that virtue pays. 

Over the first four months of this year, the S&P 500 ESG index. which tracks big U.S. companies with high ESG ratings, beat the normal S&P index by 0.6 percent. 

Indeed, the pattern is so striking that Al Gore, the former US vice-president, tells the FT that “investors who do not recognize this new reality . . . are in serious danger of violating their fiduciary responsibility to their clients by leaving money on the table, and not taking into account factors that can actually improve performance of companies.”

This is cheering for ESG evangelists, particularly as BlackRock’s number-crunching suggests similar outperformance during the market downturns of 2015-16 and 2018. But investors need to ponder why this happened.

Oil is one tempting answer. ESG portfolios typically have low exposure to fossil fuel assets, for obvious environmental reasons. This shielded ESG portfolios when oil prices collapsed this year and energy stocks slumped.

However, they attribute it to two other issues. (1) momentum and (2) better supply chain management and corporate governance. 

To get high ESG ratings, companies usually need to audit their supply chains, employee practices and internal logistics, changing them where necessary.

Walmart is typical in this respect. Three years ago, when the company pledged to cut its carbon emissions by 18 per cent by 2025, it discovered that suppliers accounted for 90 per cent of them.

Still, one rare silver lining of Covid-19 so far is that it has supported the investment case for ESG. That is especially welcome given that the pandemic may be a foretaste of what could happen under climate change.

See Gillian Tett, Why ESG investing makes fund matters more money, Financial Times, July 9, 2020. 

Special thanks to Joel C. Dobris (Professor of Law, UC Davis School of Law) for bringing this article to my attention.


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