Is ESG Investing Bunk? Yes, New Paper Finds

Research supposedly corroborates recent Department of Labor guidance

401k, retirement, ESG, Impact investingThis is dispiriting.

Two top economists are out with new information regarding environmental, social and governance initiatives (ESG) that is sure to cause controversy in the 401k space (and far beyond).

The paper, “Political, Social and Environmental Shareholder Resolutions: Do they Create or Destroy Shareholder Value?” statistically examined the equity value of public companies before, during and after the submission of proposals of this kind.

Contradicting the claims of ESG proponents, the study concluded that there is no evidence these proposals enhance shareholder value.

Further, it found that given the often high cost in time and resources involved for companies, “these initiatives are not harmless.”

The paper was written by Professor Joseph Kalt of Harvard University and Dr. Adel Turki, Senior Managing Director at Compass Lexecon.

“Companies targeted by these kinds of resolutions incur significant costs and burdens,” Kalt said. “The increased demands on management could perhaps be justified were proposals yielding material results, but the evidence suggests they are not.”

The authors noted that in recent years, the number of environmentally-oriented proposals put before companies has grown substantially.

Recognizing this, Kalt and Turki’s paper specifically explored the impact of climate related-resolutions over the last 20 years, including those which call on target companies to perform additional assessments of the potential future impact of climate change on their operations.

It concluded that “there is no evidence to support the claim that additional disclosures add materially to the information required by shareholders to make appropriate portfolio decisions, particularly given the wealth of public information on climate effects already available from governments, academics, think-tanks and sophisticated observers.”

Commenting on the statistical findings, Turki said, “Companies where shareholder resolutions demanding additional disclosures passed, do not perform better than would be expected based on market benchmarks, either in the short run or the long run. Claims that management are systematically withholding information critical to shareholders are simply not supported by the data.”

“Our paper should not be interpreted as suggesting that shareholders should ignore the problems of climate change and other social issues,” Kalt added. “But effectively responding to such problems is more properly the role of public policy, not ad hoc shareholder resolutions. While frustration with slow progress is understandably accompanied by the desire to ‘do something’, doing something effective is ultimately the task of our political institutions.”

The authors claimed the findings are therefore consistent with a Department of Labor Field Assistance Bulletin issued in April, which specified that “fiduciaries may not sacrifice returns or assume greater risks to promote collateral environmental, social, or corporate governance policy goals when making investment decisions.”

1 Comment on "Is ESG Investing Bunk? Yes, New Paper Finds"

  1. It is about time that we as investors and advisors understand the bottomline impact “ESG expectations” have on investment return. I agree with the authors that is the domain of governments not businesses. Businesses are charged with financial responsibility to the company, the shareholders and its employees..

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