Before I get into my analysis, I want to wish you and yours a prosperous 2024. Now, let's get to work.
Refinitiv Lipper Data shows that ESG funds are showing a five-year trend of underperformance as compared to their conventional counterparts. According to their findings, as of 2023, 60.4% of conventional funds underperformed compared with 69.2 % of ESG Funds. in context, an outperforming fund can underperform for fifteen years and be considered a meaningful investment based on several variables: investor appetite, goals, environmental factors, etc. However, given the baggage it comes with, meaningful or good aren't the adjectives the industry wants to hear about ESG investing. Let's assume five years is considered bad, and investors start shifting back to conventional funds; what then?
This situation brings up a tension I have always observed in business sustainability: who controls ESG, Investors or Consumers?
A Nielsen and McKinsey Report found that products making ESG-related claims averaged 28% cumulative growth over the past five-year period versus 20% for products that made no such claims.
Five years of growth for products and five years of underperformance of funds; that comparison would presume Consumers are in control. I submit not. Across industries, there is restructuring, cost-cutting and closures. While consumer purchase is promising, it is in the numbers and accountability. 28% (products) vs 60% (conventional funds) aren't close, especially given the perception issues with ESG. Also, the C-suite may answer to consumers in the media, but they answer to their shareholders ultimately.
To be clear, public scrutiny and boycotting, as we have recently seen with Starbucks and others, has a detrimental impact. However, the fact is that one or five location closures due to social or other issues out of circa 35,000 stores aren't going to change an investor focus.
Who controls ESG? Investors.
ESG Funds, like any other fund, are not immune to all of the issues the industry faces. Underperformance is part of investing, irrespective of the fund type. ESG implementation shouldn't be linked to fund performance because it simply should be the way of business. However, if this trend continues, the two will be linked; companies will double down on "greenhushing" or publicly announce they are "shifting priorities".