Fossil fuel funds may outperform ESG for now, but not in long run, experts say

Investment funds constructed using environmental, social and governance factors may be down for now, but will outperform over time, experts said Thursday.

Taking a broad view of ESG investing was one topic at the InvestmentNews ESG Summit. Senior columnist Jeff Benjamin opened that session by pointing out that the iShares energy exchange-traded fund that includes fossil fuels is up 70.96% through November, while an iShares clean energy ETF is down 2.76% over the same period.

Peter Krull, founder, chief executive and director of investments at Earth Equity Advisors, was nonplussed. “This is about investing long-term,” he said during the panel. “We are not speculating.”

While he was participating in the discussion, Krull dug up statistics to illustrate the benefit of the ESG approach over a longer horizon. He said that from 2010 to 2020, the Energy Select Sector SPDR Fund was down 33.5% while the QCLN clean energy fund was up 397%. Over that time frame, the S&P 500 was up 233.7%.

Krull called it the “lost decade” for fossil fuel investments. “That certainly dragged down the S&P.”

Elizabeth Levy, head of ESG strategy and portfolio at Trillium Asset Management, said the downturn for ESG funds is a short-term situation that shouldn’t discourage financial advisers from considering ESG factors for their clients’ portfolios.

“We don’t think that there is a structural reason that using ESG information means you would underperform over the long term,” Levy said during the panel. “We think that it helps lead to a more complete picture, which over time, over business cycles, will give us we believe stronger performance.”

One factor weighing down ESG funds in the current market is the emphasis on investing in value stocks rather than growth stocks, because there's less emphasis on sustainability among companies that fall in the value category, Krull said.

“That’s a big part of what we’re seeing, is the skewing of sustainable portfolios that are typically more on the growth side,” he said.

ESG is more about data than an investing style, Levy said. The motivation for investors to look at ESG factors is “they really care about these issues.”

But she was somewhat skeptical that funds and advisers are taking advantage of that enthusiasm to hoodwink their investors and clients about ESG strategies.

“A lot of the frustration and greenwashing claims is really just investors not understanding what kind of product they have,” Levy said.  “What that specific product is doing with the data … and what the outcome is.”

Krull cautioned against taking funds that promote ESG investing at face value.

“It comes down to due diligence and looking under the hood,” he said.

[More: Advisers who ignore ESG do so at their own r-i-s-k]