You know Your Survival Guy is an ESG skeptic, but today I’m not the only one. New research by Scientific Beta has confirmed that ESG metrics showed no evidence of an “incremental return contribution,” according to Felix Goltz, one of the study’s authors.
The study, by Italian researchers Giovanni Bruno, Felix Goltz, and Antoine Naly, states in its abstract:
This paper assesses whether ESG information helps build more efficient portfolios. Instead of treating ESG as a monolith, we build on a high dimensional information set of more than 200 ESG characteristics and employ a host of robust portfolio construction methods designed to avoid overfitting in this setting. Our results show that ESG information is not redundant, increasing the portfolio Sharpe Ratio by up to 25 percent in-sample, compared with using financial information alone. However, out-of-sample benefits are insignificant as estimation errors offset any information advantage. We also show that optimal use of ESG information does not necessarily imply positive sustainability, as portfolios contain both green tilts to factors like human rights and brown tilts to factors like sin stocks. Furthermore, using ESG metrics provides no measurable risk reduction compared with using financial characteristics alone. Our findings suggest that ESG integration fails to deliver financial benefits out-of-sample.
Action Line: The last sentence says it all. ESG fails to deliver financial benefits. ESG buyers are paying higher fees and not achieving higher returns. When you want to talk about custom portfolios that fit your plan, email me at ejsmith@yoursurvivalguy.com. And click here to subscribe to my free monthly Survive & Thrive letter.
