Reconsidering Anti-ESG Investing: A Critical Analysis

The Financial Times reported that Citigroup CEO Jane Fraser urged employees to embrace her vision for a transformative overhaul of the bank. This bold move to revamp a historically troubled institution deserves commendation. Fraser's willingness to make a decision is encouraging given the less than stellar financial landscape Sandy Weill's Citigroup assembly has created.

The debate over ESG (environmental, social, and governance) investing has gained prominence, with some critics questioning its effectiveness. This newsletter contends that ESG investment, while well-intentioned, may be misguided and ultimately counterproductive. It argues that ESG fails to consistently improve corporate behavior, deliver superior returns, or act as an effective risk-management strategy. Moreover, the fees associated with ESG investments may disproportionately benefit intermediaries, such as financiers, lawyers, and consultants. Additionally, there are concerns about the potential anti-democratic nature of ESG practices, which could divert attention from more direct tools like consumer boycotts and regulatory measures.

Become a Subscriber

Please purchase a subscription to continue reading this article.

Subscribe Now

Anti-ESG investing emerges as a potential alternative, as highlighted in a recent Morningstar report. The report indicates that there are 27 anti-ESG investment funds managing $2.1 billion in assets as of the first quarter, a modest yet noteworthy presence in the financial sector. These funds encompass various strategies, including investments in so-called "vice" industries (such as gun and tobacco manufacturers), conservative funds, and those that have renounced ESG principles.

The crux of the debate lies in whether anti-ESG funds can outperform their ESG counterparts by sidestepping perceived structural weaknesses and avoiding confusion. One potential avenue for outperformance is the notion that ESG-positive stocks may be overvalued, leaving room for the acquisition of discounted ESG-negative stocks. Even if the valuation gap never closes, investors could push for increased dividends or share buybacks, bolstering returns.

Critics argue that ESG investing has not yet significantly impacted the valuations of ESG-negative companies. However, comprehensive studies on this matter remain scarce. Given that ESG funds account for $2.8 trillion in assets, according to Morningstar, this amount may not be sufficient to sway valuations, especially when compared to the vast global financial assets in play.

Another point of contention is the potential for ESG-positive organizations to become bureaucratic and underperform over time as they shift focus from shareholder profits to broader stakeholder interests. While difficult to substantiate, this perspective warrants consideration.

The debate between ESG and anti-ESG investing is far from settled, and both approaches warrant careful consideration. As the financial landscape continues to evolve, investors and analysts alike will closely monitor these trends for their long-term implications.