When Ann, our administrative assistant, forwarded a message from ABC’s Good Morning America’s Climate Unit asking to interview me, thought it must be SPAM. There was no way little ‘ole Alexis Advisors would be singled out to be interviewed about what investors can do to stem the climate crisis. When I found out this was for real, I was ecstatic to have the opportunity to be interviewed by Elizabeth Schulze to speak about why ESG investing is so important. Cynthia Myer, one of our clients, joined me in the interview, and Jennifer Spicer, my team member, also joined the fun to be our media coach. Check out the GMA segment and give us your thoughts!

Over the past few months, the performance of many ESG-focused (Environmental, Social, and Corporate Governance) stocks has faltered and ESG investing has gone from being “the golden child” of 2020 and 2021, to being the “child that has gone astray.” The Barron’s article from 4/17/22 titled “Sustainable Investing Failed It’s First Big Test. A Reckoning is Coming” states that ESG investing is a sham and that investors are missing out on performance, particularly since ESG investing eschews investments in fossil fuels stocks.

The article states that: “…Russia’s invasion of Ukraine has created the first real test for this popular investment trend. By eschewing traditional energy stocks and defense shares, which are having a banner year, and embracing low-carbon-footprint technology stocks, which aren’t, many ESG funds lost money in the first quarter, and underperformed their benchmarks.”

It’s true. Fossil fuel stocks and the energy sector have outperformed many socially focused companies over the past 6 months. But if you extend the performance analysis over a longer period of time this outperformance is false. Take a look at the 5-year chart below. You can see that the energy sector as represented by the Energy Select Sector ETF (orange line) has vastly underperformed the S&P 500 Index (purple line.) Additionally, the energy sector has outperformed most other sectors over the past few months, not just socially focused companies.

Let’s parse this a bit more. Take a look at S&P 500 Index and the Energy Select Sector ETF (the purple and orange lines hovering at the bottom of the chart) compared to three socially focused companies: Tesla (pink line), Enphase Energy (blue line) and SolarEdge (green line).

There is clearly much more volatility in these three stocks compared to the two indices. However, over the long term – per the above illustration – these socially focused companies have vastly outperformed the S&P 500 and the energy ETF.

All markets go in cycles. We have been in a period that may persist for some time where energy and commodities outperform the broad market indices – including socially focused companies. However, we hold fast to our conviction that many people care about our environment and know that climate change is not a farse. 

Companies and governments are also taking climate change seriously. Since 2011, the number of S&P 500 companies publishing sustainability reports increased from 20% in 2011, to 90% in 2019. This was likely due to investor demand and a broader acceptance of ESG criteria. Governments around the world are also taking a more proactive approach to climate action. The Biden administration, for example, seeks to make a $2 trillion investment to help a variety of U.S. industries become more sustainable. (Source: Visual Capitalist). And according to Deloitte’s Center for Financial Services, by 2024, assets focusing on ESG are forecasted to rise to $80 trillion, or more than half of all professionally managed assets.

We understand there are limitations and that ESG screening is not a perfect science. However, we are strong believers of investing according to your values. We wholeheartedly disagree with some of the naysayers’ comments responding to the Barron’s article:

“ESG”, just another ploy by the economically ignorant politicians, will never overcome the insurmountable forces of profit motivation. If it ain’t profitable it can never sustain. 

ESG is a politically correct approach to satisfy those who demand investments be made because they serve some haughty purpose. True to investment company and brokerage marketing skills, investment products come along with a number of eloquent investment advisors to pitch and administer funds proclaiming a self-righteous approach to this flawed concept. The objective of investing is to make a profit. ESG has cleverly masked this truth. In effect, the result is not really investing. It is an underperforming charm school for social activists, politically motivated pension funds, far left foundations and the gullible.

ESG is a fad and a flawed investment strategy. By eliminating consideration of highly profitable sectors such as, fossil fuel producers, defense contractors and tobacco companies, investors are guaranteed to achieve below market returns over time.

True, ESG stocks are having a bit of a shake-out. But so are many growth stocks. We don’t think the “reckoning” that Barron’s is highlighting is anything more than part of a “typical market cycle” and that the ESG trend is here to stay. And my response to the naysayers: Check your facts.