Investing

Your ESG fund may beat the market for reasons that have nothing to do with ESG

David Callaway

Published: June 15, 2023 4:26 am

Last Updated: June 15, 2023 10:29 am

(Mark Hulbert, an author and longtime investment columnist, is the founder of the Hulbert Financial Digest; his Hulbert Ratings audits investment newsletter returns.)

CHAPEL HILL, N.C. (Callaway Climate Insights) — The superior performance of your ESG fund may not mean what you think it does.

This has been a recurrent theme of mine, as I caution climate-focused investors against thinking that their portfolios over the long term can both do good and do well. Just three weeks ago, you may recall, I discussed research that found some fund companies engage in gaming behavior to artificially boost the performance of their ESG mutual funds and ETFs.

In today’s column I will focus on another way in which funds may be beating the market for reasons having nothing to do with their emphasis on environmental, social or governmental factors: ESG funds skew towards the growth end of the value-versus-growth spectrum, which propels them towards the top of the performance scoreboards when growth outperforms value.

This spectrum refers to the well-known dimension along which Wall Street analysts categorize stocks. A company in the value camp is out of favor, with its stock trading for relatively low ratios of price to book value, sales, earnings, cash flow and so forth. The investment thesis behind investing in value stocks is “buy low, sell high.”…

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