"ESG Underperformance Will Be Its Undoing" by well-known Lance Roberts

[Tom Nolan + 2,443]

ESG Underperformance Will Be Its Undoing

by Tyler Durden

Tuesday, Jul 19, 2022 - 10:40 AM

Authored by Lance Roberts via RealInvestmentAdvice.com,

ESG underperformance will be the strategy’s eventual undoing. We have discussed the many problems with ESG investing in previous posts.

• The Great Wall Street Money Heist

• Wall Street Wins Again As ESG Infiltrates Retirement Plans

In those previous articles, we primarily focused on the excessive expense ratios charged for funds that are essentially duplicates of low costs benchmark indexes. To wit:

With ESG now the rage, the “demand” drives product development. However, there is also an understanding of why large asset managers have embraced the strategy so readily – higher fees.

Yes, you too can own an ESG fund that is almost three times as expensive as the S&P 500 index, all for the sake of “feeling good about yourself.” 

While ESG investing gets promoted as a way for individuals to “invest with their principals,” such has been a windfall marketing scheme by Wall Street firms.

Been There, Done That

In the late ’90s, Wall Street moved to limit investing in “sin” stocks such as gambling, tobacco, etc. Just as it was then, investors initially jumped on board, but when returns failed to outperform the benchmark index, that “fad” died.

The same occurs today as investors who want to be “woke” are demanding products that make them feel good to purchase. However, just as we have witnessed with the various ARKK ETFs, while you may “feel good” about owning “disruptive” companies, that changes quickly when those companies are no longer performing.

The same occurred with the allure of cryptocurrencies as “laser-eyed” zealots retreated into the abyss following a crushing decline.

Such is inherently the issue facing ESG funds. Investors might be willing to pay higher expense ratios as long as they earn higher returns. However, ultimately they will focus on ESG underperformance, which will likely become more prevalent as funds that previously underperformed and lost assets simply rebranded themselves.

“Epic greenwashing is everywhere: Out of 253 funds that switched to an ESG focus in 2020 in the US, 87 per cent of them rebranded by adding words such as ‘sustainable’ or “ESG” or ‘green’ or ‘climate’ to their names.

None changed their stock or bond holdings at that point.” – Eco-Business

Unsurprisingly, the buzzword of “investing scam” is gaining more traction.

“The Securities and Exchange Commission said this month that it was planning on cracking down on misleading ESG claims. New rules ‘would specify disclosures to be made by investment funds when they mention terms like ‘ESG,’ ‘low-carbon’, or ‘sustainable’ in their names.

Regulators are also looking at ‘ESG funds marketing and how environmental, social and governance is incorporated into investing along with these funds voting at companies’ annual meetings.” – Bloomberg

Not surprisingly, outflows are rising as ESG underperformance continues.

Inflation Could Kill ESG

Another problem for the ESG “investing scam” is inflation. If you believe inflation is here to stay, ESG underperformance will continue. While 2022 has been a year of “inflation” concerns by the Fed, the underperformance of ESG relative to the energy sector has been quite profound.

“As Deutsche Bank’s Jim Reid puts it, ‘one of the side effects of the hawkish pivot from the Fed in 2022, that continued this week’ is that it could finally crack the facade of ESG and make January a catastrophic month for ESG investors; this is shown in Reid’s Chart of the Day which lays out the 1-month rolling difference between S&P 500 Energy sector returns and the NASDAQ.” – Zerohedge

However, that underperformance didn’t just start in January of 2022. In 2021 the surge in money supply led to increasing rates of inflationary pressures. As we showed previously, inflation is currently running well above the Fed’s target inflation rate.

Not surprisingly, that inflationary surge showed up at the gasoline pump as oil prices rocketed higher. As a consequence, and of no real surprise, investors dumped ESG funds in favor of “dirty energy.” (It is worth noting that ESG funds also underperformed the SPY tracking index.)

ESG investing may be great for headlines, but it is all about performance when it comes to investors.

Want To Be ESG, Plant A Tree

Another problem with ESG investing is that it makes NO difference to the environment.

Think about how mutual fund investing works for a moment.

As investors buy shares of a mutual fund, the fund manager then purchases shares of the underlying investments from the open market. The underlying companies receive no capital from the transaction, nor are they aware a transaction occurred.

In this scenario, how were carbon emissions reduced? Were trees planted? Did companies take a different direction with their management teams?

If you want to be a socially responsible investor, there is only ONE way to achieve that goal. You must invest directly in private startup companies tackling climate change effectively. Once a company is public, all you do is trade dollars for another investor’s shares. As noted, that transaction has ZERO impact on the environment or the company.

ESG Is In Trouble

RBC Wealth Management surveyed over 900 US-based clients recently. 49% said that performance and returns were a higher priority than ESG impact, up from 42% last year.

“The story told is you don’t have to give up returns in order to do ESG. But everyone assumed that you would get the same exact return profile as a traditional benchmark. Which is absolutely not true because traditional benchmarks are not looking at ESG factors.” – Kent McClanahan, VP Responsible Investing at RBC.

RBC clients also expressed skepticism about the ESG label. 74% of those surveyed said many companies provide misleading information about their ESG initiatives. As noted, the SEC’s proposal for new restrictions to ensure ESG funds accurately describe their investments could address that problem.

“ESG is in trouble. For proof, look no further than the Bloomberg Opinion headline “The Virtue Bubble Is About to Burst, Good Riddance,” Or, the news the head of Deutsche Bank’s fund management unit got toppled after police raided looking into alleged “greenwashing.”

Much of this is an understandable overreaction to the understandable over-praise that the concept enjoyed for many years. It also reflects the growing realization that ESG only seemed to be a good idea because it delivered great returns. At first, with big money flows being directed into places that hadn’t received so much capital before. ESG was almost a self-fulfilling prophecy. A big element of its success to date, it now becomes apparent, is good old-fashioned return-chasing.” – John Authers, Bloomberg

Ultimately, investors constantly seek out investment performance over time. As such, ESG investing will either evolve or give way to a new breed of “Sin Stocks.”

I suspect that Wall Street will win whichever way it eventually turns out.

https://www.zerohedge.com/markets/esg-underperformance-will-be-its-undoing

Edited July 19, 2022 by Tom Nolan

[Ron Wagner + 734]

Right on Tom, and very important for this analysis to be shared. It is probably well understood but the government owned funds may stick with it and their individuals that depend on retirement funds better take a close look as well as any employee that works for a liberal corporation. 

[Ron Wagner + 734]

https://oilprice.com/Energy/Energy-General/Even-ESG-Funds-Are-Now-Buying-Big-Oil-Stocks.html Here is proof that they are hypocrites and liars. 

[TailingsPond + 1,044]

2 hours ago, Tom Nolan said:

While ESG investing gets promoted as a way for individuals to “invest with their principals,” such has been a windfall marketing scheme by Wall Street firms.

In the late ’90s, Wall Street moved to limit investing in “sin” stocks such as gambling, tobacco, etc. Just as it was then, investors initially jumped on board, but when returns failed to outperform the benchmark index, that “fad” died.

The same occurs today as investors who want to be “woke” are demanding products that make them feel good to purchase. However, just as we have witnessed with the various ARKK ETFs, while you may “feel good” about owning “disruptive” companies, that changes quickly when those companies are no longer performing.

 

Do you think tobacco is a growth industry and a good long-term investment?  Is gambling good for the people?

You are supporting evil investing - Money above all. "Invest in drugs and gambling! Highest returns!"

"Feel good" stocks are better than knowing you are doing evil with your money.

Edited July 20, 2022 by TailingsPond

[TailingsPond + 1,044]

17 minutes ago, Ron Wagner said:

Right on Tom, and very important for this analysis to be shared. It is probably well understood but the government owned funds may stick with it and their individuals that depend on retirement funds better take a close look as well as any employee that works for a liberal corporation. 

You sound like the government having money is bad.

Don't worry you are running massive deficits.

 

[TailingsPond + 1,044]

12 minutes ago, Ron Wagner said:

https://oilprice.com/Energy/Energy-General/Even-ESG-Funds-Are-Now-Buying-Big-Oil-Stocks.html Here is proof that they are hypocrites and liars. 

Are you sure none of your investments go towards good or green causes?  Wouldn't want you to be a hypocritical liar when you discover your mutual fund has some green energy or healthcare investments as part of their portfolio.

Not sure a "pure evil" fund could be considered balanced.

Is a pharmaceutical company evil? They make good and "bad" products.

 

Edited July 20, 2022 by TailingsPond

[Ron Wagner + 734]

https://michaelshellenberger.substack.com/p/green-dogma-behind-fall-of-sri-lanka

 

Green Dogma Behind Fall Of Sri Lanka

Organic farm advocates said they wanted what's best for the 22 million people of the island nation off the coast of India. What went wrong?

Michael Shellenberger

Jul 9

243

36

 

 

Police use water canon to disperse farmers taking part in an anti-government protest demanding the resignation of Sri Lanka's President Gotabaya Rajapaksa on July 6, 2022. (Photo by AFP) (Getty Images)

Sri Lanka has fallen. Protesters breached the official residences of Sri Lanka's Prime Minister and President, who have fled to undisclosed locations out of fear of death. The proximate reason is that the nation is bankrupt, suffering its worst financial crisis in decades. Millions are struggling to purchase food, medicine and fuel. Energy shortages and inflation were major factors behind the crisis. Inflation in June in Sri Lanka was over 50%. Food prices rose by 80%. And a half-million people fell into poverty over the last year.

But the underlying reason for the fall of Sri Lanka is that its leaders fell under the spell of Western green elites peddling organic agriculture and “ESG,” which refers to investments made following supposedly higher Environmental, Social, and Governance criteria. Sri Lanka has a near-perfect ESG score (98) which is higher than Sweden (96) or the United States (51).

To be sure, there were other factors behind Sri Lanka’s fall. Covid lockdowns and a 2019 bombing hurt tourism, a $3 billion to 5 billion-per-year industry. Sri Lanka’s leaders insisted on paying China back for various “Belt and Road” infrastructure projects when other nations refused to do so. Sri Lanka racked up a huge foreign debt. Growth had been declining since 2012. And higher oil prices meant transportation prices rose 128% since May.

But the biggest and main problem causing Sri Lanka’s fall was its ban on chemical fertilizers in April 2021. Many other developing nations had to deal with similar challenges, including covid and high foreign debt, but have not collapsed. Indonesia has suffered terrorist bombings, which harmed tourism, but managed to rebound, and tourism rebounded in Sri Lanka starting last year. And while economic growth declined after 2012 but from astronomical peaks of 8% and 9% and remained above 3% and 4% until 2020.

The numbers are shocking. One-third of Sri Lanka’s farm lands were dormant in 2021 due to the fertilizer ban. Over 90% of Sri Lanka’s farmers had used chemical fertilizers before they were banned. After they were banned, an astonishing 85% experienced crop losses. The numbers are shocking. After the fertilizer ban, rice production fell 20% and prices skyrocketed 50 percent in just six months. Sri Lanka had to import $450 million worth of rice despite having been self-sufficient in the grain just months earlier. The price of carrots and tomatoes rose five-fold. While there are just 2 million farmers in Sri Lanka, 15 million of the country’s 22 million people are directly or indirectly dependent on farming.

Things were worse for smaller farmers. In the Rajanganaya region, where the majority farmers operate just a hectare (2.5 acres), families reported 50% to 60% reductions in crop harvest. “Before the ban, this was one of the biggest markets in the country, with tonnes and tonnes of rice and vegetables,” said one farmer earlier this year. “But after the ban, it became almost zero. If you talk to the rice mills, they don’t have any stock because people’s harvest dropped so much. The income of this whole community has dropped to an extremely low level.”

But the damage to tea was the key to Sri Lanka’s financial failure. Tea production had generated $1.3 billion in exports annually. Tea exports paid for 71% of the nation’s food imports before 2021. Then, tea production and exports crashed 18% between November 2021 and February 2022, reaching their lowest level in 23 years. The government’s devastating ban on fertilizer thus destroyed the ability of Sri Lanka to pay for food, fuel, and service its debt.

 

The crisis accelerated from that moment forward. At the end of August 2021, President Gotabaya Rajapaksa declared a state of emergency and two months later tried to reverse course. But it was too late. “We don’t have enough chemical fertilizers,” Rajapaksa said, “because we didn’t import them. There is a shortage.” In May 2022, Sri Lanka failed to pay $77 million on its foreign debt repayments. It seems like a small amount but the default made it hard for Sri Lanka to borrow money, and so it devalued its currency, inflation rose 30%, and the government ran out of the cash it needed to import fuel, food, and medicines.

What, exactly, were Rajapaksa and other Sri Lankan leaders thinking? Why did they engage in such a radical experiment?

Share

[Jay McKinsey + 1,491]

4 hours ago, TailingsPond said:

Are you sure none of your investments go towards good or green causes?  Wouldn't want you to be a hypocritical liar when you discover your mutual fund has some green energy or healthcare investments as part of their portfolio.

Not sure a "pure evil" fund could be considered balanced.

Is a pharmaceutical company evil? They make good and "bad" products.

 

Ron uses electricity from a green provider because it is the lowest cost he could find. 

 

Edited July 20, 2022 by Jay McKinsey

[Jay McKinsey + 1,491]

37 minutes ago, Ron Wagner said:

https://michaelshellenberger.substack.com/p/green-dogma-behind-fall-of-sri-lanka

 

Green Dogma Behind Fall Of Sri Lanka

Organic farm advocates said they wanted what's best for the 22 million people of the island nation off the coast of India. What went wrong?

Michael Shellenberger

Jul 9

243

36

 

 

Police use water canon to disperse farmers taking part in an anti-government protest demanding the resignation of Sri Lanka's President Gotabaya Rajapaksa on July 6, 2022. (Photo by AFP) (Getty Images)

Sri Lanka has fallen. Protesters breached the official residences of Sri Lanka's Prime Minister and President, who have fled to undisclosed locations out of fear of death. The proximate reason is that the nation is bankrupt, suffering its worst financial crisis in decades. Millions are struggling to purchase food, medicine and fuel. Energy shortages and inflation were major factors behind the crisis. Inflation in June in Sri Lanka was over 50%. Food prices rose by 80%. And a half-million people fell into poverty over the last year.

But the underlying reason for the fall of Sri Lanka is that its leaders fell under the spell of Western green elites peddling organic agriculture and “ESG,” which refers to investments made following supposedly higher Environmental, Social, and Governance criteria. Sri Lanka has a near-perfect ESG score (98) which is higher than Sweden (96) or the United States (51).

To be sure, there were other factors behind Sri Lanka’s fall. Covid lockdowns and a 2019 bombing hurt tourism, a $3 billion to 5 billion-per-year industry. Sri Lanka’s leaders insisted on paying China back for various “Belt and Road” infrastructure projects when other nations refused to do so. Sri Lanka racked up a huge foreign debt. Growth had been declining since 2012. And higher oil prices meant transportation prices rose 128% since May.

But the biggest and main problem causing Sri Lanka’s fall was its ban on chemical fertilizers in April 2021. Many other developing nations had to deal with similar challenges, including covid and high foreign debt, but have not collapsed. Indonesia has suffered terrorist bombings, which harmed tourism, but managed to rebound, and tourism rebounded in Sri Lanka starting last year. And while economic growth declined after 2012 but from astronomical peaks of 8% and 9% and remained above 3% and 4% until 2020.

The numbers are shocking. One-third of Sri Lanka’s farm lands were dormant in 2021 due to the fertilizer ban. Over 90% of Sri Lanka’s farmers had used chemical fertilizers before they were banned. After they were banned, an astonishing 85% experienced crop losses. The numbers are shocking. After the fertilizer ban, rice production fell 20% and prices skyrocketed 50 percent in just six months. Sri Lanka had to import $450 million worth of rice despite having been self-sufficient in the grain just months earlier. The price of carrots and tomatoes rose five-fold. While there are just 2 million farmers in Sri Lanka, 15 million of the country’s 22 million people are directly or indirectly dependent on farming.

Things were worse for smaller farmers. In the Rajanganaya region, where the majority farmers operate just a hectare (2.5 acres), families reported 50% to 60% reductions in crop harvest. “Before the ban, this was one of the biggest markets in the country, with tonnes and tonnes of rice and vegetables,” said one farmer earlier this year. “But after the ban, it became almost zero. If you talk to the rice mills, they don’t have any stock because people’s harvest dropped so much. The income of this whole community has dropped to an extremely low level.”

But the damage to tea was the key to Sri Lanka’s financial failure. Tea production had generated $1.3 billion in exports annually. Tea exports paid for 71% of the nation’s food imports before 2021. Then, tea production and exports crashed 18% between November 2021 and February 2022, reaching their lowest level in 23 years. The government’s devastating ban on fertilizer thus destroyed the ability of Sri Lanka to pay for food, fuel, and service its debt.

 

The crisis accelerated from that moment forward. At the end of August 2021, President Gotabaya Rajapaksa declared a state of emergency and two months later tried to reverse course. But it was too late. “We don’t have enough chemical fertilizers,” Rajapaksa said, “because we didn’t import them. There is a shortage.” In May 2022, Sri Lanka failed to pay $77 million on its foreign debt repayments. It seems like a small amount but the default made it hard for Sri Lanka to borrow money, and so it devalued its currency, inflation rose 30%, and the government ran out of the cash it needed to import fuel, food, and medicines.

What, exactly, were Rajapaksa and other Sri Lankan leaders thinking? Why did they engage in such a radical experiment?

Share

The fertilizer ban was the last straw after everything else broke and it wasn't done for ESG

When Sri Lanka's foreign currency shortages became a serious problem in early 2021, the government tried to limit them by banning imports of chemical fertiliser.

It told farmers to use locally sourced organic fertilisers instead.

This led to widespread crop failure. Sri Lanka had to supplement its food stocks from abroad, which made its foreign currency shortage even worse.

https://www.bbc.com/news/world-61028138

[specinho + 496]

📢  📢   party pooper   party pooooppppeeerr   party poooooppppeeerrrrrrrrrr  📢  📢

anyone notices that liquid detergent consists of basic nutrients Nitrogen, Phosphorous, Potassium required by the plants?

A plant at the side of house had yellowish spots along the veins of leaves. It might be  lacking of nutrients..... Diluted minute amount of liquid detergent and sprayed onto the soil......... ttaadaaallllaaaa........ It looks healthy again after a week............