Studies show that Environmental, Social and Governance investments as more resilient than other strategies and that companies with high ESG ratings tend to outperform their peers. Yet old-school bottom-line watchers, fiduciary purists, insist this is nonsense. 

These bottom-line Puritans have gathered their forces around a line of defense as they seek to discredit ESG’s ideals: that socially responsible, impact strategies will falter in the next recession. 

“To critics, underperformance of ESG strategies during a down market would be another affirmation that values-aligned investing is associated with below market-rate returns,” says Avi Deutsch, a principal at the asset management firm Vodia Capital. “ Every nay-sayer in every investment committee or legacy financial institution would have additional ammunition to try and shut out ESG.”

New Evidence Favors ESG

It’s important to note that in a downturn, private markets may prove more resilient, buffering impact investors from the pain of pursuing ESG strategies in public markets. In public markets, share prices may move south in lockstep – as they did in 2008, at least in the beginning when it seemed the world was coming to an end. 

When investors caught their breath, the search for bargains and yield commenced, and  investors went into stocks likely to boom: for example, Walmart, Ross Stores, McDonald’s, and H&R Block. None of them rank notably high on ESG metrics (though Walmart appears to be trying). 

Since those dark days, a large body of evidence – and even more anecdotal conjecture – has emerged to argue that companies with high ESG ratings will take the punch of a recession better than their values-neutral peers.  For instance, a January 2019 reportbased on 2,800 global stocks by the BlackRock Investment Institute that concluded ESG portfolios can be more resilient in downturn scenarios. 

Studies of recent market volatility provides even greater reason for optimism. 

  • An analysis by the financial research firm Morningstar of S&P 500 stocks during the most volatile week of 2018 found that almost two-thirds of all sustainable funds in the U.S. finished in the top half of their respective sectoral categories.
  •, which tracks exchange traded funds, found that last year 17 of the largest 26 such ETFs out-performed the sector’s conventional bench mark – the Vanguard Total World Stock ETF. 
  • Bank of America/Merrill Lynch reported in 2018 that investors who only bought stocks with above-average environmental and social scores would have avoided more than 90% of bankruptcies that occurred in the S&P 500 since 2005. 

Room for debate

For all this evidence, the relative immaturity of ESG strategies makes bold predictions difficult. It also creates a yawning void into which ideologues of all sides can project their hopes and fears. As a result:

  • Impact evangelists point to the growing popularity of sustainable strategies as evidence of their effectiveness. ESG AUM grew from about $8.7 trillion to $12 trillion from 2016 to 2018, according to the US Forum for Sustainable and Responsible Investment.  
  • Fiduciary Puritans (those who think that nothing other than returns should govern investment strategy) argue there is insufficient historical data to posit that ESG strategies will do any better than traditional approaches, and some reason to believe they’ll do worse. 

“There’s still a belief on Wall Street that people are product driven, says Jeffrey Gitterman, a leading voice in the ESG investment world and co-founder of Gitterman Wealth Management.” 

But what they’re not understanding is that millennials, and women as well, but millennials particularly, they’re really identifying with the purpose and the brand behind the product.” (See Karma’s earlier interview with Gitterman). 

The bottom line, Gitterman says, is that ESG is for real, its focus on governance and other sustainable metrics provide resilience, and its critics are kidding themselves.

Like a Dog with a Bone

But until there is a recession to test all this once and for all, don’t expect ESG’s critics to go away. 

In a speech in June, a Trump appointee to the Securities and Exchange Commission evoked Puritan New England to warned that ESG is being used like  “a Scarlet Letter” to hamper the ability of some companies to raise money on public markets.

Well, yes, that’s the point, isn’t it? But let’s allow Commissioner Hester Peirce put the case in her own words: 

“We are seeing a similar scarlet letter phenomenon in today’s modern, but no less flawed world …. in which corporations are being assessed according to Environmental, Social, and Governance (ESG) factors. Here too we see labeling based on incomplete information, public shaming, and shunning wrapped in moral rhetoric preached with cold-hearted, self-righteous oblivion to the consequences, which ultimately fall on real people. 

“In our purportedly enlightened era, we pin scarlet letters on allegedly offending corporations without bothering much about facts and circumstances and seemingly without caring about the unwarranted harm such labeling can engender.” 
Peirce’s speech is part of a campaign afoot in the Trump administration to slow the factors driving the growth of mission-driven investing generally (see last week’s column on the SEC’s attack on proxy advisors).

In the end, it will take a real recession to put this debate to bed. Until then, the evidence suggests ESG data is a good way of sewing resilience into your portfolio.