ESG - are there any LO asset managers that do NOT focus on it?
It seems like a majority of long-only asset management firms have incorporated ESG factors into some part of their fundamental investing process. If certain clients want that, so be it, but I think there's a sizable contingent of institutional investors (e.g. public pensions in certain U.S. states - see the 3/30/23 open letter from 21 state AG's to dozens of asset managers) and retail investors who want ESG nowhere near their investment accounts. At a personal level, I got into the asset management industry because I enjoy researching industries / businesses and making fundamental investment decisions based on these insights in conjunction with valuation work, etc. In my industry coverage area, ESG hasn't really inhibited my ability to invest in any company I determine to be attractive for our funds, but it does take quite a bit of time and focus away from me (and my PM's) which could be better allocated to meeting with management teams / industry calls / data analysis / portfolio discussions and so on - in other words, stuff that if executed well should drive outperformance vs. our benchmark. In case it isn't clear, I do not believe that incorporating ESG factors matters for fund performance (a whole separate topic, happy to discuss it in the comment section). Thus, the question noted above - if I wanted to stay in long-only asset management (equity or FI) but avoid firms that have drank the ESG kool-aid, what do my options look like?
ESG is just the latest way to grow assets and charge a premium - particularly valuable in an industry struggling to do both. I would think of it more from a business perspective than these firms really “drinking the look aid”
Totally agree on your first sentence. On your second, some firms especially European-based ones are particularly obnoxious about it. But it probably just depends on who your clients are.
100%. On a further note, the last year (as scrutiny has become more directed) points to the elasticity of the ESG doctrine. The true nature of ESG is an amorphous, anything goes concept that shifts shape and form, depending on who is defining it, and when. Whether ESG does any good is a matter of opinion, but whether it does well can be measured - this is what those who push the grift want to avoid.
Work at a large AM, and feel that focusing on ESG-related KPIs & datapoints is genuinely making me worse at my job / wasting my time not being focused on idea generation or ramping up on a sector. "Greenium" in my view is BS in fixed income as your return at the end of the day is par + int. It is clear all large shops are incorporating to protect wallet share and perhaps charge a higher fee (while not paying you more..).
But to your question, your shop probably has non-esg/green strategies that should not take into account those items in your allocation process (at least theoretically..). Otherwise what I have found is you probably need to be willing to shift focus away from large AMs and towards boutique shops or hedge funds that either don't have the resources/bandwidth for ESG, have not implemented it yet in their process, or just don't wish to incorporate it. Also be wary of shops with dedicated internal ESG teams that will try to vye for positioning in the investment process down the road or establish contact with issuers themselves (a new front in internal corporate politics).
cc: Ozymandia
Explain to these illiterate Q-Anons how dumb they sre
So to be clear, your argument is that some of the largest, most sophisticated investment vehicles/funds in the entire world are incapable of understanding what their most important clients want, but you know better? And your only evidence is a letter from a bunch of highly political attorneys general who can only make the vaguest allegations about "fiduciary duties"? Who even cares what the state AGs say? You think an asset manager should take advice on professional ethics from someone like Ken Paxton?
You've made a series of assumptions here, someone of which aren't even related to each other, and drawn the conclusion you wanted to draw for it. If you can prove that (a) ESG investing yields lower returns than would otherwise be achieved (which is impossible) AND (b) that the majority of investors in these funds don't want money going to ESG causes, then maybe you have an argument. But you haven't shown either of those thing. You've made vague allegations which rely on the assumption that ESG is "bad"
Well, as an investor, I make decisions on more than just fund performance, as does everyone. Whether it is a conscious bias or not, we all make those decisions every day. Besides, at least one part of ESG is a no brainer - investing in companies with strong corporate governance seems to me like a statement that no reasonable person could or should take issue with. You are making the explicit statement that investing in companies with no oversight will drive performance better than one that has good governance - and you know what, I bet that's true! In the short term, at least. After all, history is littered with examples of companies that drove a ton of performance for their investors or shareholders... because they were cooking the books. It is amazing to me that you can sit here and make an implicit argument in favor of investing in that kind of company
Hi Ozymandia - thanks for your opinions on this, appreciate hearing a different perspective.
Regarding clients, I cited the state AG's as one recent example. I do think these government officials, however politicized their motives may be, have an ability to sway how their respective state allocates public retirement fund dollars. So their views do matter, even if you disagree with them. Yet beyond that, we (my firm) meet with insurance companies and pension funds on a regular basis and have encountered instances of CIO's explicitly stating that they don't want to invest in funds that use ESG as part of their process, which I thought was notable. I work in fixed income and ultimately a lot of these investors simply need solid risk-adjusted returns to help meet their funding goals or close funding shortfall gaps, which differs from say the goals / missions of a school endowment or family office.
On returns, I think the jury is still out on whether an explicit ESG strategy adds value. Google "does esg investing outperform" and you'll see a variety of industry / academic articles from credible institutions arguing both sides. Also, here's one basic example: I used the Bloomberg COMP function to compare total returns of the S&P 500 index (SPX) with an S&P 500 ESG Index (SPXESUP). On a trailing 5 year basis, the S&P ESG index outperforms the S&P by ~100bps annually. But change the time horizon to trailing 10 years and that figure flips - the S&P outperforms the S&P ESG version by ~100bps annually. I haven't done a deep dive on ESG fund performance nor am I leaning on this anecdotal evidence too much; I just want to highlight that the benefits of this style of investing are pretty unclear. Last thing on this point: I've noticed that the ESG scoring firms (such as MSCI or Sustainalytics) tend to rate most highly the asset-light firms - mostly due to lower carbon emissions - while rating lower the asset-heavy firms (which tend to be commodities / industrials) due to higher carbon emissions. Is 1 & 3 year performance actually driven by the decision to avoid high carbon emitters? Practically you're just making a factor bet, one that helped in the mid-2010s as asset-light info. tech only went up, and one that hurt in the mid-2020 onwards commodity rally.
Your final paragraph focuses on the governance part of ESG. No doubt that governance matters. I've worked at an equity-focused shop previously and I'd read proxy statements, review management incentives, evaluate ethics-related situations involving management, etc. But this wasn't in the name of ESG, it was just what you did to screen out situations where management / a board of directors might harm you as a shareholder. This is just part of the process at a competent equity fund manager, it's not a new invention. I'll make two caveats: (1) if you only invest in companies that have excellent governance (or 's' or 'e' characteristics), you're going to miss a lot of "so-so" or "not so great" E/S/G companies that otherwise offer compelling risk adjusted returns. (2) I work in credit. As "VP in AM" noted above, at the end of the day I'm here for coupon + par. Management has no obligation to me except for what my credit agreement or indenture says they have. Is good governance going to make or break me getting coup + par? The vast majority of the time, no. Especially if we're talking <7 year maturities. Same with 'e' or 's' characteristics. The situations you've got to watch out for are massive litigation events (talc powder, PFAS, opioids, etc.) but again, that's something that *competent* fundamental analysis should be identifying as a risk anyhow.
I agree they'll carry weight... I just think it's worth noting that just because the Attorney General says something, doesn't mean that we should agree with or even condone it. Your original post made the point that the opinion of highly political figures like these attorneys general says something about a generic appetite among institutional investors for anti-ESG investing. That is not at all clear, and I'm not sure we should lend any credence to what these people think, any more than we should start believe stories about "litter boxes in schools" merely because some elected officials complain about their existence. When you understand that an attorney general is elected, and you then think about who their constituents are, the idea that they'll publicly push back against ESG investing all of a sudden makes sense without validating any of the claims being made - the people who vote for Republican officeholders are, broadly speaking, more interested in conspiracy theories that feed their sense of outrage than they are in facts, let alone fiduciary duties.
I mean, your anecdotal evidence is what it is. I find it hard to believe that you are finding lots of people/companies that are saying "we won't invest in a fund/entity that uses USG metrics in evaluating investments." I find it very easy to believe that many people don't care, but the idea that lots of people are out there saying "we refuse to invest in a fund which is well governed, or has a diverse board" seems much harder to believe.
Well, I'm curious to know more about that - ESG investing is a much bigger deal now than it was 10 years ago, so I would find it easy to believe that those funds are doing better and better. Also, how are those companies included in the index? If company XYZ started implementing ESG metrics in 2018, is it's performance tracked for the five years previously too? Just curious.
Either way, all that this says, if it says anything, is that ESG investing is no different than any other type of investing "strategy" in a purely economic sense. Which means anyone complaining about it doesn't have a leg to stand on.
Exactly, which is why all the brouhaha around "ESG investing" is just the next meaningless outrage-generator by (mostly) right wing elected officials/conspiracy morons. Ticking that box is extremely easy; if anything, people should complain that ESG investing is so easy to do that it effectively has no meaning. But just like litterboxes in schools for kids who identify as "furries," it's not about a real issue or a real instance of breaching fiduciary duties to clients - conservatives can put "environmental" or "social" justice concerns in scare quotes and then claim whatever the hell they want, and they'll be believed, because their core voter base is more concerned with confirming their own biases than, well, anything else
Take with a grain of salt, but in my personal experience value managers seem to on average be less on board with esg than the industry as a whole
I 1000% feel you. ESG is not what I am passionate about and is not why I got into research. However, keep in mind a couple points:
1. ESG will only become more prevalent over time in public equities. Started with Europe but now US is aggressively pursuing it and won't be long before rest of dev ex US does the same
2. Think of it like this. Most funds are just not set up to outperform (too little active share, super diversified, generally not very talented teams). ESG offers an offset to keep money in active vs. going passive
I don't like it either but the sad reality is moving forward outperformance will only get harder, not easier. And it's not easy to being with these days. So either join a shop where you can have an associate do most of your ESG heavy lifting for you, a small shop where the tedious ESG work is smaller vs. the larger firms where the process is more elaborate, or find something else to do. Not sure that with LLMs that the current industry structure is tenable anyway
Good points, thanks Sequoia. What is LLM’s?
ESG is a concept that was born in sanctimony, nurtured with hypocrisy, and sold with sophistry all the way. It is just another example, yet again, of the intertwining of religious beliefs with pagan environmentalism.
In order for ESG investing to "work," which is implicitly using other people's money to do social good, it cannot increase expected returns. The point of ESG investing is to expand favored industries and companies, while lowering the stock price and raising the cost of capital of disfavored industries, thereby slowing down their investment. But the cost of capital for an industry is the investor’s expected return, so if ESG works it raises expected returns of disfavored industries, and lowers the expected return of favored ones. In other words, if ESG investing does social good, it has to lose money. Indeed, research shows that while some investors are willing to pay higher fees and accept lower returns to try to achieve social good, the cost of divestment is borne by investors, not corporations.
ESG is not about corporate governance, if it were it would be called just "G" and there would be no concern about its implementation. Shit, if ESG was simply about being ethical, meritocratic, and maximizing shareholder returns there would be zero pushback. But that's not the case because ESG is profoundly political and entirely subjective. The more subjective and opaque, the more malleable it is for activism and corruption. It is so telling that even the most staunch defenders of ESG don’t even know what it is, so they begin from a place of ignorance and then attempt to define it as some friendly, neighborhood corporate governance regime with a sprinkle of environmental concerns.
The data indicate that, as common sense would suggest, companies that focus on profits outperform companies that don’t. As a corollary, it seems obvious that asset managers won’t maximize shareholder returns if that isn’t their focus. It’s hard enough to generate profits and returns when that is your focus, let alone when you’re trying to change the world.
The bottom-line is that ESG is a virtue-signal which has nothing to do with what it claims on the surface, and everything to do with advancing specific progressive objectives — which have been roundly rejected through our democratic processes — through the use of other people's money and corporatism.
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