Environmental, social, and governance investing can have a lot of
benefits, but higher returns is not one of them, according to
AQR Capital Management founder Cliff Asness.
In his latest blog post, Asness says those who promote
so-called negative screening avoiding or divesting
bad stock holdings as a means to make more
money over time are mostly wrong and actually
at odds with the very point of ESG investing.
ESG investors should view smaller gains as the way to bring
about the change theyre seeking in the world, according
to Asness. Blacklisting sin stocks by definition
does not help performance. If removing such shares from a
portfolio does help, he says, theyre not constraints as
its the action that would be taken anyway for the sake of
Pursuing virtue should hurt expected returns, he
wrote in the blog. Accepting a lower expected return is
not just an unfortunate ancillary consequence to ESG investing,
its precisely the point.
As Asness explains, constraints are needed to push investors
to do things they otherwise wouldnt out of
By default, he said, an ESG investor who screens out certain
assets is going to earn less, and the slimy sin
investor is going to earn more, than either would in the
absence of the ESG investors portfolio constraints. But
this is exactly how the ESG investor makes an impact, according
If the virtuous decide they wont own something,
the sinners then have to, and they have to be induced to
through getting a higher expected return than otherwise,
he said. This in turn is achieved through a lower than
This hurts the sinful company, which will have
to use a higher discount rate or cost of capital
in new investment projects in order to deliver that higher
expected return. Sinful projects become less
profitable, and fewer are undertaken the exact outcome
desired by ESG investors, according to the blog.
This might be a painful reality to swallow for the
virtuous, Asness wrote. To get precisely what they
want, which is less of the bad stuff occurring, they have to
pay the sinful investors in the form of a higher expected
While all of this sucks, investors hoping to
make a positive impact will simply have to embrace the
suck, according to Asness.
Thats because without it there is no effect on
the world, no good deed done at all, he said.
Perhaps this necessary sacrifice is why its called