Do ESG investments outperform? One investor says ‘no way’

McClatchy-Tribune Information Services

July 28, 2018

For a different take on environmental, social, and governance-based investing, or ESG, we spoke with Vanguard investor Dan Wiener, who publishes a monthly newsletter on all things Vanguard.

Wiener takes a dim view of ESG. That’s largely due to under-performance over a long period of time, he said.

"Over time, ESG and SRI (socially responsible investing) strategies have not proven to be performance winners," Wiener contends. "They may allow their investors to sleep better at night from a social-conscience point of view, but they aren’t going to put more money in your pocket, they aren’t going to give you more money to direct towards the social, environmental, or governmental issues that matter most to you, and they haven’t had much of an impact, if any, on corporate-governance practices."

Plus, one investor’s definition of what makes an investment ESG-worthy might make another recoil, he adds.

Let’s take Vanguard’s own Vanguard Social Index (symbol: VFTSX), which has been around since May 2000, longer than many exchange-traded funds and mutual funds in this category. Since 2000, the fund has lost ground to the tune of 1.0 percent per year when matched against the S&P 500 Index. Vanguard Social Index did claw back some losses since the latter months of the 2008 bear market, due to heavier stakes in technology and health-care stocks.

His may not be a popular stance, "but when it comes to an exclusionary index approach that removes ‘bad’ companies, like Social Index’s benchmark FTSE index, I am skeptical that you are doing good. I also don’t like your chances of outperforming the broad market," Wiener said.

Why? He believes negative screens — avoiding certain stocks — don’t motivate public companies to change.

"When you sell a stock — say, ExxonMobil — because you don’t want to own fossil-fuel-related companies, someone else is on the other side of that trade buying ExxonMobil. Exxon’s board or CEO doesn’t give a hoot that you sold your shares, because some other investors took your place. Plus, when a company like Wells Fargo is among the 10 largest holdings in Social Index, you could argue that the fund fails on the very first social pillar of ‘do no harm,’ " he said.