How'd funds fare in 2020 when viewed through an ESG lens? We assign Globe Ratings, w/'High' (ie 5 globes) going to funds whose holdings court less ESG risk and vice versa for 'Low' (1 globe). Tldr: Funds w/higher ESG ratings beat their M* idx more often than those w/lower ratings

Given this, it's not too surprising that higher ESG-rated funds generated larger avg. excess returns (vs. M* cat. index) in 2020 than lower ESG-rated funds, meaning there was a better payoff to investing in funds that courted less ESG risk. That said, caveats apply...
1st caveat: When we look at success rates by 'intentionality' (ie, is strategy intentionally aiming to incorporate ESG, etc), we find success rates don't vary much by rating. In other words, success didn't depend as much on whether fund was actually *trying* to minimize ESG risk
Along those lines, there was a better payoff to minimizing ESG risk among non-intentional than intentional ESG funds. That is, there was a wider spread in the avg. excess return of higher- and lower-ESG rated non-intentional funds than there was among intentional funds. Nuanced.
Worth noting there are relatively few 'intentional' ESG funds. Of 4,000+ funds I examined, ~460 were classified 'Sustainable Investment--ESG Overall' as of 12/31/19, the starting point for the study. So, non-intentional funds drive the results.
2nd caveat: Relationship between ESG risk/fund success varied a lot by asset class. Nearly all ESG-rated funds invest in stocks (US stock funds >50% of all). Relationship strongest among intl stock funds, where higher ESG-rated succeeded nearly twice as often as lower ESG-rated.
This is even more apparent when we examine avg. excess returns by ESG risk and asset class. There's not a clear relationship between ESG risk and avg. payoff among US stock and bond funds whereas it's much clearer among intl stock funds.
There's a lot of debate about whether incorporating ESG helps or hurts returns and I'm not sure the above--which covers a single year and looks at it on a few relatively simple measures--settles it any. But hopefully it sheds a bit of light on perf trends last year, fwiw. /end
ps -- I'm aware that some ESG investors don't concern themselves with beating a benchmark, as they measure their goals in other ways/non-financial terms. Given that, the above will be irrelevant to them.
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More from Finance

1/ I'm thrilled to announce the launch of my new website, a one-stop shop for all the content I'm creating.

There you'll find links to all my podcasts, the TTMYGH newsletter, and other exciting future projects.

2/ In 2020, I reignited my passion for interviewing brilliant people by launching The Grant Williams Podcast in various forms, including The End Game, The Super Terrific Happy Hour, and The Narrative Game.


3/ Starting February 1, I'm taking the bold step of moving these podcasts completely behind a paywall.

For the very affordable price of only $10 a month, listeners can gain access to the Copper Tier of
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4/ Why am I doing this? First and foremost, I aspire to create VALUABLE content. By definition, if something is priced at $0, it isn’t valuable. The time, effort and creativity that goes into these episodes is substantial. To keep doing them properly, they can no longer be free.

5/ I also strongly believe content creators should be able to make a living creating content. If everything is free, that’s not possible. I never seriously considered accepting outside sponsors – complete integrity is too critical to me.
Inflation is coming, inflation is coming!

Last month I wrote about the distinction between long-term secular inflation and shorter-term cyclical inflation

It has been clear for several months that we are in the middle of a cyclical rise in


The full thread can be reviewed here:


Today's PPI report should have been expected to surprise to the upside as the leading indicators of inflation have been screaming to the upside for months!

Here is the ISM prices paid index, cumulated into a growth rate

3/


Industrial commodity prices have also seen a major acceleration for months.

4/


So today's PPI report was in line with the leads, suggesting that we have a cyclical upturn in inflation that is * primarily concentrated in the manufacturing sector *

This is a key point.

5/

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