Evan Simonoff THE LONG VIEW
els of profitability have outperformed over time .
Depending on whom one talks to these days , ESG is either the first truly unique , innovative concept in the asset management business in the last 30 years or , as Alicia Munnell , director of Boston College ’ s Center for Retirement Research has said , the latest marketing gimmick of active asset managers desperate for tricks as they fail to keep up with index investing . And there is still a sizable contingent of people who share Friedman ’ s original critique of corporate responsibility and believe that ESG is simply the latest variant of socialist mush promulgated by limousine lefties .
Whatever your take is , the ability of ESG funds to attract assets has overwhelmed the money management world . A decade-long run in asset-light tech stocks with minimal environmental footprints has fueled the boom — and the performance numbers of many ESG funds and ETFs have been spectacular
“ There ’ s an optic around ESG that it is mainly a marketing approach . … A hundred percent of this is client-driven . With European and Australian clients , they demand it . It ’ s basically table stakes .”
— Mike Hunstad , Northern Trust Asset Management til it encompasses the vast majority of all professionally managed assets .”
Any movement with this kind of momentum deserves a strong dose of skepticism . However , managers in the space take issue with critics who argue ESG is just a marketing gimmick employed by frustrated active managers .
“ There ’ s an optic around ESG that it is mainly a marketing approach ,” says Mike Hunstad , head of quantitative strategies at Northern Trust Asset Management . The reality , in his view , is that “ 100 % of this is client-driven . With European and Australian clients , they demand it . It ’ s basically table stakes .”
Looking across the asset management landscape , Hunstad says many rivals are struggling to keep up . “ Investor demand is driving this ,” he says .
The stampede into ESG is spawning a smorgasbord of businesses looking to service the burgeoning industry . At least five ratings agencies are now offering a variety of metrics to help asset managers analyze companies on the characteristics that dovetail with their strategies .
Already there are critics . At a recent press luncheon in April , Loomis Sayles portfolio manager Dave Rolley voiced a question about ESG ratings . Until early March , a leading provider of these ratings , MSCI , assigned a “ BBB ” rating to Russia and a “ CCC ” rating to General Motors , despite the auto giant ’ s hugely ambitious plan to transform itself into a leading producer of environmentally friendly electronic vehicles .
Rolley also wryly noted that last time he checked , General Motors CEO Mary Barra “ hadn ’ t invaded three countries .” A quick scan of other ESG ratings could also produce similar dubious evaluations .
Other ESG raters and money managers have made themselves targets for critics many times before . In 2010 , numerous ESG and other socially conscious funds were holding shares of BP , which had promoted itself as a next-generation energy concern even as its Deepwater Horizon well leaked millions of barrels of oil into the Gulf of Mexico . enough to induce envy among the concept ’ s critics . This was exacerbated by the pandemic and the work-from-home phenomenon it created .
In the favorable environment of 2020 and 2021 , many ESG funds and ETFs managed to outperform a soaring S & P 500 , and investors have taken notice .
In a recent report , Big 4 accounting firm Deloitte wrote that , at their current growth rate , ESG-mandated assets were on track to represent half of all professionally managed assets globally by 2024 . ( It defined ESG mandated assets as “ professionally managed assets in which ESG issues are considered in selecting investments or shareholder resolutions are filed on ESG issues at publicly traded companies .”)
“ Some believe ,” Deloitte said in the report , “ that we are entering the watershed moment where the growth of professionally managed assets with an environmental , social and governance ( ESG ) mandate will only accelerate un- Continued on page 61
28 | FINANCIAL ADVISOR MAGAZINE | MAY 2022 WWW . FA-MAG . COM