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If You Want a Smaller Pension Invest in ESG Funds

By Ian Madsen, Frontier Centre for Public Policy

Part of the original pitch for an Environmental, Social and Environmental, ‘ESG’, investment strategy – i.e., putting your money into a basket of socially aware green, diversity and pseudo-woke social justice friendly investments – is that it would benefit the world while generating a higher return.

The mooted reason for ESG’s supposed superior performance is that stocks of high-ESG-scoring firms cause less pollution, habitat destruction, or greenhouse gas emissions.  ESG stocks supposedly brings employee diversity, including among top executives and boards of directors. Also, ESG engenders high engagement in ‘stakeholder capitalism’; i.e., management’s actions toward suppliers, customers, staff and communities, all while avoiding slave labour, unsafe working conditions, or repressive regimes.

According to ESG proponents, such companies’ stock values will outperform others, because their managers would be more astute and cognizant of important risks to avoid and opportunities to exploit, such as information technology, new products and services; especially in the so-called ‘Green Transition’, intended to replace traditional ‘dirty’ energy (i.e., fossil fuels).

However, in perhaps a surprise to most ESG enthusiasts, and even to the general public and policymakers, ESG-sensitive funds have not outperformed broader index-invested funds (those that track either the broad Toronto Stock Exchange, ‘TSX’, Composite Index, or the large-capitalization, ‘large cap’, TSX/S&P 60 Index, either in the short or the longer-term).

BlackRock, the world’s largest fund manager, specializing in index funds, with trillions of dollars in assets under management, are aggressive evangelists for ESG investing. BlackRock has many exchange-traded funds, ‘ETF’s’, that track Canadian stock and bond indices.

In contrast, BlackRock’s iShares Jantzi Social Index ETF, ticker ‘XEN’, which is managed along ESG lines (its official ‘ESG’ fund only started three years ago), versus BlackRock’s TSX (Toronto) Composite Index Fund, ticker symbol XIC, had returns of, Year-to-Date (to February 28th):  3.83% vs. TSX fund:  4.75%; One Year:  -.32% vs. TSX return of -1.25%; Five Year:  7.41% vs. TSX of 8.83; Ten Year:  7.69% vs. TSX fund of 7.82% . Looking beyond Blackrock funds, the blue-chip TSX/S&P 60 Index Fund, XIU, returns were even higher compared to the ESG fund: respectively, 4.55%, 1.78%- 9.19% and 8.26%.)

It is obvious that in longer-term periods, broader index returns exceeded ESG-managed ones. (The Pandemic oil price crash and IT mania distorted returns in 2020.) This proves  ESG advocates wrong;  heeding their advice diminishes wealth, harming investors, including pension plan members.

U.S. analyses show similar ‘bad’ ESG investing results. More strangely, some oil and gas firms show up in both ESG and non-ESG funds.  Also, most of the top ten stocks are the same:  banks, pipelines, and, inevitably, Shopify. Yet, the ESG manager charges twice the fees of their regular index funds.  Avoiding ESG, and, instead, examining the ESG-hated oil and gas sector, returns for XEG, BlackRock’s Capped Energy Sector ETF’s, the Year-to-Date, One Year, Three Year, Five Year and Ten Year:  returns were respectively, -0.84%, 19.00%, 32.32%, 10.43% and 2.17% (2014 and 2020 both brought oil price crashes).

Fund managers avoiding or minimizing energy exposure have underperformed the market badly. ESG dogma not only is ‘dubious’ and unjust to energy shares, it has diminished returns investors should expect and deserve.

Green virtue signalling ESG funds are a path to smaller pensions.



Ian Madsen is the Senior Policy Analyst at the Frontier Centre for Public Policy.