Why Pension Funds & Millennials Should Avoid ESG
Plain and Hidden Costs of ESG Investing
December 2019. Reading Time: 10 Minutes. Author: Nicolas Rabener.
SUMMARY
- ESG ETFs underperformed the stock market since 2005
- Likely explained by higher fees, a constrained stock universe, and sector bets
- Financially-impaired investors like public pension funds and Millennials should avoid ESG investing
INTRODUCTION
If investors would be looking for the ETF flavor of the year, then it would likely be ESG as highlighted by the large number of product launches in 2019. In the US, six ESG-focused ETFs have grown to more than $1 billion of assets under management, which is an important milestone that only approximately 400 other ETFs have reached, out of a global universe of close to 7,000.
However, the total assets under management in ESG-focused ETFs is only approximately $25 billion, which is less than one percent of total assets in the ETF industry, according to data from ETFGI. Given that most equity and fixed income investment products can be structured to be ESG-compliant, there is plenty of further room to grow. Blackrock, the world’s largest asset manager, expects $400 billion in assets under management by 2028.
Two investor types that are particularly keen on ESG investing are public pension funds and Millennials, essentially representing the old and the young. However, there is a case to be made that neither of these should consider ESG investing, which we will outline in this short research note (read ESG Investing: Too Good to be True?).
101 OF ESG INVESTING
ESG investing basically means separating good from bad corporate citizens as measured on environmental, social, and governance metrics. Investors evaluating ESG strategies should carefully consider the following:
- Additional costs: Investing in ESG requires additional resources from investors, either directly or indirectly, if investing is outsourced to a fund manager. Money needs to be spent on buying ESG ratings from data providers like MSCI or FTSE. Furthermore, staff needs to be hired to evaluate the data, which typically requires expensive data scientists given large and complex data sets.
- Data issues: There are many providers that