Environmental, Social, and Governance (ESG) Investing: An Evaluation of the Evidence

Summary of Study

Bottom Line: The goal of proxy advisory firms' voting recommendations should be to enhance the risk-adjusted returns of investors. Yet their promotion of Environmental, Social, and Governance Investing (ESG) objectives threatens investor returns. This study finds that over the long-term it is difficult for ESG funds to outperform the broader market indices.

ESG programs, as documented by many studies, can be detrimental to a firm’s financial performance. Consequently, investors need an individualized and objective view to effectively evaluate the merits of ESG related shareholder proposals, or when considering an ESG investment strategy.

There are concerns that the two major proxy advisory firms – ISS and Glass Lewis, which control 97 percent of the proxy advisory market – have a conflict of interest that biases their recommendations in favor of ESG shareholder proposals regardless of the resolution’s merits. When coupled with these firms’ inadequate transparency and lack of individualized analysis, there is growing evidence that the proxy advisory firms are biasing votes toward supporting value-reducing ESG proposals.

This analysis evaluates the performance of 30 ESG funds that have either existed for more than 10-years or have outperformed the S&P 500 over a short-term timeframe. The findings showed:

  • Of the 18 ESG funds examined that had a full 10-year track record, a $10,000 ESG portfolio (equally divided across the funds including the impact from management fees) would be 43.9 percent smaller after 10-years compared to a $10,000 investment into an S&P 500 index fund.
  • Further, only 1 of the 18 funds was able to exceed the earnings of an S&P 500 benchmark investment over a 5-year investment horizon, and only 2 of the 18 funds were able to beat the S&P 500 benchmark over a 10-year investment horizon.

Two other material differences were the higher expense ratios and higher risks associated with ESG funds. With respect to higher expenses, the average expense ratio was 0.69 percent for the 30 ESG funds examined compared to the expenses associated with a broad-based S&P 500 index fund of 0.09 percent. It is common wisdom that a critical consideration for investors, particularly for small investors, is to ensure that a fund’s expenses are as low as possible.

Read the full study here

Feature Charticle

Historical Performance: SPY Compared to Equal Weighted ESG Fund Portfolio Management Expenses Included PRI

Findings:

  • Of the 18 Environmental, Social, and Governance Investing (ESG) funds examined that had a full 10-year track record, a $10,000 ESG portfolio (equally divided across the funds including the impact from management fees) would be 43.9 percent smaller after 10-years compared to a $10,000 investment into an S&P 500 index fund. 
  • The goal of proxy advisory firms' voting recommendations should be to enhance the risk-adjusted returns of investors. Yet their promotion of Environmental, Social, and Governance Investing (ESG) objectives threatens investor returns.
  • There is growing evidence that the proxy advisory firms are biasing votes toward supporting value-reducing ESG proposals.