Is ESG Good or Bad?

"The best way to predict the future is to create it." Peter Drucker


ESG is a massive topic; in fact, so big that it is hard to give it justice in the approximately 1,500 words I have at my disposal in these monthly letters. Consequently, I have decided to split it over two months. In this first part, I will focus on performance – does ESG investing generate alpha, or is it just a fad? In next month’s part two, I will turn my attention to the impact of ESG – has it in fact changed anything? Has the world actually improved as a result of ESG?

How do we treat ESG at Absolute Return Partners?

At the very least, ESG has become a buzzword. To some, it has even become a religion. Whether one or the other, I often wonder whether it is good or bad for performance when you comply with the principles behind ESG, and that is essentially what this month’s Absolute Return Letter is about.

Before I go there, allow me to put the cards on the table and tell you how we deal with ESG at Absolute Return Partners. Essentially, we think there is often too much box-ticking and not enough qualitative thinking going into many ESG assessments. Consequently, we take a more qualitative approach. We aim to always invest responsibly, but we admit that we are not yet where we want to be. Investing responsibly is a very complex process which takes years to refine, and we are still on that journey.

The essence of ESG investing

(This section is largely a copy and paste from an article called “How is ESG Affecting Stock Returns?”, published in 2020 by the School of Economics and Management at Lund University, Sweden.)

ESG has three pillars – the “E”, the “S” and the “G”. The first pillar, the Environmental pillar (the “E”), focuses on how a company performs as a steward of the environment. As the changing climate has become frontpage news all over the world, the “E” has, of the three pillars, been awarded the most attention by the investment community.