ESG: A Tale of Two Studies

ESG: A Tale of Two Studies

The following commentary/analysis is one I wrote in my capacity as a senior fellow at “the nation’s oldest consumer protection agency,” Consumers Research, where, among other things, I compile a weekly letter for public pension-fund managers.  I am sharing it here today because I thought it might be useful to some of you.


Five Reasons Why ESG Is Still Confusing.

Last week, the good folks at Bloomberg Intelligence – the namesake of one of the most aggressive ESG promoters in the world – did their very best to convince the rest of us that the fight against ESG has been a miserable failure, that ESG is already profoundly embedded in global businesses and markets and simply cannot be exorcised at this late date.  Tim Quinson provided the details:

Using environmental, social and governance metrics is now mainstream, according to 89% of investors who responded to a survey published Wednesday by Bloomberg Intelligence. And 57% said the “ESG” label shouldn’t be replaced by something less incendiary, despite the backlash.

ESG is primarily being used to “improve profit, competitiveness and brand value,” according to Bloomberg Intelligence, whose full survey findings are based on responses from 250 C-suite executives and 250 senior investors distributed evenly across the US, Europe and the Asia-Pacific region.

Overall, the survey found that 85% of investors think ESG leads to “better returns, resilient portfolios and enhanced fundamental analysis.” Among executives surveyed, 84% said ESG helps them “shape a more robust corporate strategy,” according to Adeline Diab, BI’s director of ESG strategy and research.

This story (and the study on which it’s based) is fascinating, to say the least.  It paints a picture of near-universal acceptance of and support for ESG, in addition to near-universal belief in its effectiveness and value to businesses, investors, and markets.  It presents a bold and collectively accepted new vision for 21st-century commercial conduct.

As luck would have it, however, Bloomberg’s was not the only study published last week.  In an article published by Fortune – another historical advocate of ESG – two academic researchers recounted the findings of their own examination of ESG and its impacts.  And they are somewhat different from Bloomberg’s.

After gathering the subset of stocks that were traded on a daily basis between 1998 and 2020 on the three major exchanges as well as ESG data, we quantitatively studied the inclusion of ESG metrics in two ways. First, we consider trading strategies that only rely on returns, rather than a combination of returns and ESG scores. We found that non-ESG rules that incorporate returns result in higher ESG scores, compared with ESG-based rules.

Second, we considered trading strategies that prioritize the stocks with the highest overall ESG score, reflecting the increased attention that ESG has received in recent years. We found that it does not result in the most efficient portfolio in terms of risk-adjusted returns. While including ESG data leads to portfolios with higher returns, it was at the cost of more volatility.

Our results may come as a surprise: Because of the noise inherent in ESG metrics, including them creates estimation risk and worsens the portfolio allocation. In fact, we find that the explicit targeting of ESG metrics leads to a portfolio allocation that is economically and environmentally worse than the market allocation.


This too is fascinating.  Not only does it confirm the current post-ESG zeitgeist, it also directly contradicts the perceptions documented in the Bloomberg study.  How, one is left wondering, can two contemporary studies offer such bluntly discrepant views on ESG and its relative worth in managing and evaluating business productivity and value?

Inarguably, the answer to that question – and to all the other contradictory noise surrounding ESG – is exceptionally complicated and multifaceted.  That said, what follows are, I believe, the five most likely explanations.

First, it is important to note who the subjects of the Bloomberg study are, i.e: “250 C-suite executives and 250 senior investors distributed evenly across the US, Europe and the Asia-Pacific region.”  One suspects that the strongest support for and acceptance of ESG among these investors and c-suite execs is found in the responses from Europe and, to a lesser extent, Asia.  The regional differences in concern about climate change, as well as the general tendency in these regions to tolerate greater co-mingling of politics and business are well documented and probably explain much of the overwhelming nature of the findings.  One would have to have access to all of the cross-tabs to be certain, of course, but it seems likely that most of the dissent from the majority opinion is located in the United States.

Second, we must consider the economic drivers of the responses given in the Bloomberg survey. Investors and especially business executives have serious and tangible incentives for buying into the ESG narrative.  Not only do ESG funds generally produce higher commissions for management companies, but the overwhelming majority of corporations in the United States and Europe now compensate their executives in part based on their realization of ESG-based targets.  Incentives matter, and it should hardly be surprising that both investors and executives align their beliefs with practices that they are incentivized to embrace.

Third, although both studies cited above deal with ESG and its impact on business and markets, one deals with self-reported opinions and perceptions, while the other deals exclusively with concrete data.  One is subjective, and the other is objective.  One deals with the vicissitudes and malleability of politics, while the other deals exclusively with cold, hard reality.  Both studies measure ESG, but they do so using radically differing methodologies.

Fourth, ESG remains easy to define in theory and incredibly difficult to define in practice.  ESG variables, measurements, and justifications remain messy, confusing, and often contradictory.  Is it “ESG” for a corporation to utilize renewable energy sources when it is practical and cost-effective?  Or is that merely good business?  Is it ESG to invest in American natural gas projects that relieve European reliance on Russian gas?  Or is all fossil fuel production off-limits?  ESG has always been, in part, in the eye of the beholder, and it remains so today.

Fifth and finally, the overwhelming support for ESG in the Bloomberg study, in spite of the data documented in the Fortune-published study, probably has a great deal to do with the following line tucked away in the Bloomberg article: “A key finding of the Bloomberg Intelligence survey was the role played by ESG regulations and legislation in steering corporate strategies and capital flows.”


In the end, the state is all that matters.  If the state tells you that carbon emissions data are material, then carbon emissions data are material.  If the state tells you that superficially diverse hiring practices make for a better company, then, superficially diverse hiring practices make for a better company.  And if the state tells you that ESG is “now mainstream,” then, by God, ESG is now mainstream.  It takes guts to be the guy who puts his neck in the noose by declaring that the state is wrong and is making things worse – and again, this is especially so in locales outside the United States.

I have long argued that the business case for ESG is dead and that the power of the state is what nevertheless keeps it alive and relevant.  This “key finding” in the Bloomberg study appears to confirm that.  In most cases and in most places, it is much easier to go along to get along than it is to take Public Enemy’s advice and fight the power.

Clearly, ESG is not going anywhere any time soon.  In some ways, it is, as Bloomberg Intelligence suggests, entrenched.  At the same time, there is ample evidence demonstrating that it results in serious misallocations of capital, poor business practices, and diminished return on investment, all in the name of values and rationales that are not fulfilled or advanced in any way.

This tension will persist, but those on one side of it will ultimately be more successful than those on the other.

Stephen Soukup
Stephen Soukup
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Steve Soukup is the Vice President and Publisher of The Political Forum, an “independent research provider” that delivers research and consulting services to the institutional investment community, with an emphasis on economic, social, political, and geopolitical events that are likely to have an impact on the financial markets in the United States and abroad.