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Are left-leaning corps as profitable? Does ESG investing work?

The Snitzer Death and Destruction Fund launched on the NASDAQ today with $5 billion in AUM. Said CEO T Snitz Esq, "we invest exclusively in Defence contractors, Tobacco growers, and Coal Manufacturers."

Is ESG Profitable? The Numbers Don’t Lie

Corporations that remain neutral on social and political issues outperform companies that lean left.

By Mike Edleson and Andy Puzder, WSJ

March 10, 2023 5:15 pm ET

Capitalists invest money, and manage companies, to do well financially. Proponents of so-called woke capitalism claim that companies can do “well” financially by doing “good” politically. The idea is that advancing a political agenda will also enhance profits and shareholder returns. Whether this does good is a matter of opinion, but whether it does well can be measured.

Woke capitalism makes its way into financial markets through an ill-defined concept known as environmental, social and governance investing. Huge investment managers use their ownership of shares to pressure companies to jump on the ESG train. But while individual investors are free to support whatever causes they wish with their dollars, those who invest other peoples’ money have a fiduciary duty to focus solely on clients’ financial interests. Thus it’s important to know whether politically focused companies actually do produce superior financial results.

To answer this question, we used research from 2ndVote Analytics Inc., a company that scores U.S. large-cap and midcap companies on their social and political engagement on five-point scale. Analytics evaluates company data on six social/political issues—the environment, education, abortion, Second Amendment rights, other basic constitutional freedoms and support for a safe civil society—and also generates a composite score. Company scores, updated quarterly, range from 1 (most liberal) to 5 (most conservative), with 3 meaning neutral or unengaged.

On average, roughly a quarter (or 221) of the S&P 900 large/mid-cap companies studied scored 3—taking no political or social stance on any of these six issues—during the period from June 30, 2021 (when the data was first available), through Jan. 31, 2023. Of the remaining companies, the political tilt was strongly to the left. More than 59% scored liberal, and under 15% conservative (with only one company higher than 4).

We used a neutral score of 3 as a proxy for companies that focus on investors’ returns rather than activism. We then compared the performance of those neutral companies with the market (represented by the S&P 500 and Russell 1000) as well as major ESG-registered funds. The point is to demonstrate how well a portfolio of business-focused politically neutral companies performs compared with those potentially distracted by political issues.

In making this comparison, we used a third-party index-calculation agent and market-value weighting in a manner similar to the S&P 500 and Russell 1000 benchmarks (total returns). The ESG products’ returns include the effect of fees; the neutral-universe and benchmark indexes don’t. The analysis covers the full period for which company scores were available, including the market runup in the last half of 2021, the 2022 bear market and the early-2023 rebound.

The results are compelling. The market was down overall, by 1.8% for the S&P 500 and 3.2% for the Russell 1000. ESG funds performed worse, with most losing 2.5% to 6.3%. A simple index composed of only neutral companies gained 2.9%, significantly outperforming both broad-market and ESG indexes in up and down markets. Notably, the benchmarks include the outperforming neutral companies—indicating that the politically active companies further underperformed.

We checked the robustness of this result in several additional analyses by varying the time frame (extending the index return calculation back five and 10 years) and the index construction (weighting). Across each time frame, the index of neutral companies significantly outperformed the S&P and Russell benchmarks. Essentially none of the performance difference could be attributed to sectoral composition or to how recently stocks were added to the indexes.

For a longer view, we compared the performance of the more than 200 companies that remained neutral over our data period with the benchmarks over the past 10 years. The neutral portfolio’s cumulative return (334%) outgained the market (230%); the results were substantially more compelling using equal-weighted returns as an alternative method.

One interesting result is the point at which performance notably begins deviating—2017-18, around the time companies (and perhaps their profits and returns) began feeling pressure from the power and influence of supposedly passive asset managers such as BlackRock, State Street and Vanguard, as those behemoths’ push into ESG intensified.

The data indicate that, as common sense would suggest, companies that focus on profits outperform companies that don’t. As a corollary, it seems obvious that asset managers won’t maximize shareholder returns if that isn’t their focus. It’s hard enough to generate profits and returns when that isyour focus, let alone when you’re trying to change the world.

When the business of business is no longer business, it may be unclear who wins, but it’s clear that shareholders lose.

Mr. Edleson is a retired chief risk officer of the University of Chicago’s endowment and former chief economist of Nasdaq and the NASD and is a director of 2ndVote Value Investments Inc., parent company of an investment-advisory firm that licenses 2ndVote Analytics’s scores. Mr. Puzder, a former CEO of CKE Restaurants, is chairman of 2ndVote Value Investments and a senior fellow at the Heritage Foundation.

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