No evidence that ESG ETFs outperform the market

Here’s a note from Andreas Rasche about this FT article:

A still unpublished study finds that there is no evidence that ESG ETFs outperform the market. Annual returns for ETFs with an ESG profile were 0.2% lower than for non-ESG ETFs.

To me, this just shows again that ESG ETFs have little to do with sustainability. ESG ETFs are often constructed based on ESG ratings and hence they contain a confused mixture of companies, some of which are far from being a sustainable business. Fossil fuel firms are well represented in ESG ETFs. Building ESG funds on ratings paints an incomplete picture: raters overweigh financial/risk materiality but have less to say on firms’ wider ESG impacts on society (hence tobacco stocks receive excellent ratings).

What we need are ESG funds that really do what analysts are supposed to be good at: fundamental analysis of a company instead of following ESG ratings (which are highly divergent in any case). Analysts need to understand the business models of companies and then analyze the E, S, and G effects on and of this model (double materiality).

What makes the current study different is that it measures long-term effects (2012-2022). The big claims about ESG ETFs outperforming the market were based on short-term observations. In 2020 and 2021, ESG ETFs did very well, but this was due to the Corona pandemic and the fact that such funds overweigh tech stocks and underweigh energy stocks.