While powerful asset managers, such as BlackRock, are pressuring companies to cater to liberal environmental, social and governance (ESG) agendas, a new analysis finds that companies that aren’t influenced by politics outperform those that are.
In a Wall Street Journal commentary, “Is ESG Profitable? The Numbers Don’t Lie,” veteran investment industry experts Mike Edleson and Andy Puzder present the findings of their study of the effect of ESG politics on company fortunes.
The study uses a ratings firm’s five-point sale (1 = most liberal, 5 = most conservative) scoring of U.S. large and midcap companies’ social and political involvement regarding the following six issues:
- Environment,
- Education,
- Abortion,
- Second Amendment rights,
- Other basic constitutional freedoms, and
- Support for a safe civil society.
During the period from June 30, 2021-January 31, 2023, companies were far more likely to be liberal than either neutral or conservative:
- About a quarter of the S&P 900 large/mid-cap companies studied scored 3 (no political or social stance),
- More than half (59%) scored liberal, and
- About one is six (15%) rated as conservative, with only one company earning a score of 5.
When the performance of politically-neutral companies (those with a composite score of 3) was compared to that of either the overall market (S&P 500 and Russell 1000) or ESG-registered funds, the non-political companies came out on top:
The overall market and ESG indexes were down:
- S&P 500 down 1.8%,
- Russell 1000 down 3.2%
- ESG funds performed worse, with most losing 2.5% to 6.3%.
In contrast, a simple index composed of only neutral companies gained 2.9%, “significantly outperforming both broad-market and ESG indexes in up and down markets,” Edleson and Puzder report. “Notably, the benchmarks include the outperforming neutral companies—indicating that the politically active companies further underperformed,” they add.
They also note that the performance-gap between neutral and politically-driven companies began to widen in 2017-2018, about the same time that powerful asset managers like BlackRock, State Street and Vanguard began to wield their considerable influence to pressure companies to embrace ESG, at the expense of profit.
Given the results, “It seems obvious that asset managers won’t maximize shareholder returns if that isn’t their focus,” Edleson and Puzder conclude.
Other studies appear to support their finds. A Bloomberg analysis found that, over the past five years, an ESG portfolio would have garnered a 6.3% return, while a non-ESG one would have increased by 8.9%.
Likewise, a recent survey by The Trafalgar Group found that more than three-quarters of voters would prefer to do business with a company that stays out of politics.
Read The Wall Street Journal’s “Is ESG Profitable? The Numbers Don’t Lie.”
Editor's Note: This piece was originally published on CNSNews.com
