ESG’s Underperformance So Far This Year

November 28, 2022

How have environmental, social and governance ETFs performed this year? Since so many people (especially foundation board members) have asked me about ESG funds, I thought I’d take a look to test the theory that companies with high ESG scores tend to outperform.  

I examined the 10 largest ESG funds by assets under management from the ETF.com Socially Responsible ETF channel. Asset sizes ranged from $2.9 billion to $20.3 billion. Annual expense ratios were between 0.09% and 0.40%.  

Then compared year-to-date performance to broader ETFs, using the same fund family when possible. Admittedly, this is over a short period of time. Below are the ETFs I used for the analysis: 

 

ESG   Comparable Non-ESG Fund 
ESGU  iShares ESG Aware MSCI USA ETF  ITOT  iShares Core S&P Total U.S. Stock Market ETF 
ESGD  iShares ESG Aware MSCI EAFE ETF  EFA  iShares MSCI EAFE ETF 
ESGV  Vanguard ESG U.S. Stock ETF  VTI  Vanguard Total Stock Market ETF 
ICLN  iShares Global Clean Energy ETF  IYE  iShares U.S. Energy ETF 
ESGE  iShares ESG Aware MSCI EM ETF  EEM  iShares MSCI Emerging Markets ETF 
DSI  iShares MSCI KLD 400 Social ETF  ITOT  iShares Core S&P Total U.S. Stock Market ETF 
SUSA  iShares MSCI USA ESG Select ETF  ITOT  iShares Core S&P Total U.S. Stock Market ETF 
USSG  Xtrackers MSCI U.S.A. ESG Leaders Equity ETF  VTI  Vanguard Total Stock Market ETF 
VSGX  Vanguard ESG International Stock ETF  VXUS  Vanguard Total International Stock ETF 
SUSL  iShares ESG MSCI USA Leaders ETF  ITOT  iShares Core S&P Total U.S. Stock Market ETF 

 

How many of the top 10 ESG ETFs bested the broader ETF? The answer surprised me: It was zero. 

 

ESG Fund YTD Performance  Comparable Non-ESG Fund  YTD Performance  ESG Outperformance   YTD Flows ($M)
ESGU  -16.92%  ITOT  -16.10%  -0.82%  -$314.55 
ESGD  -15.63%  EFA  -14.92%  -0.71%  $511.30 
ESGV  -20.46%  VTI  -16.15%  -4.31%  $885.37 
ICLN  -2.72%  IYE  70.96%  -73.68%  -$106.37 
ESGE  -23.04%  EEM  -19.34%  -3.70%  -$837.78 
DSI  -18.90%  ITOT  -16.10%  -2.80%  $309.63 
SUSA  -18.47%  ITOT  -16.10%  -2.37%  -$585.22 
USSG  -17.73%  VTI  -16.15%  -1.58%  -$452.20 
VSGX  -18.63%  VXUS  -16.39%  -2.24%  $517.56 
SUSL  -17.63%  ITOT  -16.10%  -1.53%  -$610.47 
          -$683.00 

 

So far this year, the 10 ESG funds with the most assets underperformed the broader ETFs by between 0.71% and a whopping 73.68%. As we all know, the stock market is down this year, so both the ESG funds and the peer groups had negative returns.  

The one exception was energy, where the iShares U.S. Energy ETF (IYE) turned in a positive 70.96% return. By comparison, the iShares Global Clean Energy ETF (ICLN) lost 2.72%. It was the best performing of the 10 ESG ETFs, but also the biggest laggard.  

By far the best-performing sector year to date through Nov. 15, 2022, is energy, gaining 68.5% versus the S&P 500’s 17.0% decline. Energy typically fails most (but not all) ESG screens.  

Clearly, 10 months is much too short of a time frame to say that ESG investing has failed. But some investors do think it has failed, because fund flows for these top 10 ESG ETFs are in negative territory to the tune of $683 million.  

By contrast, overall fund flows for U.S. stock and international stock ETFs were a positive $257 million and $80.8 million, respectively. In other words, investors overall are turning cool to ESG after underperformance. 

My View 

I’m a strong believer in being socially responsible. I’ve been driving the same Chevrolet Volt for nearly 10 years, getting more than 250 miles per gallon, and only needing to fill up about three times a year.  

But I own energy stocks as part of my total stock index fund. I even own a tiny bit of ExxonMobil, though mostly because of its sentimental value, as it was my first employer after business school. If I sold my ExxonMobil, someone would buy it and it wouldn’t help the world to be any more socially responsible. There would be no economic consequence to the company. On the other hand, buying less gasoline lowers revenue and profits for oil companies. 

Nearly three years ago, I wrote about why I was turning a cold shoulder to ESG investing. In part, my view of what qualifies for ESG companies may not be the same as an ESG fund manager’s view. In fact, the ETF.com ESG Channel is described as listing companies MSCI ESG Research evaluates with regard to their risks and opportunities around ESG investing and practices. Yet they are generally not even ESG funds. ESG funds are found in the Socially Responsible ETF Channel

The past three years have not changed my opinion on ESG ETFs. I’m going to continue to buy the broadest of the index funds at the lowest costs, which I know will include stocks that may be bad for the environment, that may not promote worthwhile social causes and that may include poorly governed companies.  

Instead, I’ll do what I’ve been telling clients to do for well over a decade: Own the entire market and take the cost savings and give to the causes you believe in. 

My decision might not be yours, so if you do some ESG investing, keep your costs low and stay committed. 

 

Allan Roth is the founder of Wealth Logic LLC, an hourly based financial planning firm. He is required by law to note that his columns are not meant as specific investment advice. Roth also writes for Barrons, AARP, Advisor Perspectives and Financial Planning magazine. You can reach him at [email protected], or follow him on Twitter at Allan Roth (@Dull_Investing) · Twitter. 

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