Cliff Asness: ESG May Help the World But It Won’t Help Your Portfolio

Worse performance is the trade-off for effecting change through “negative screening” in environmental, social, and governance investing, the AQR founder says.


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 they’re 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, they’re not constraints as it’s the action that would be taken anyway for the sake of higher returns.

“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, it’s precisely the point.”

As Asness explains, constraints are needed to push investors to do things they otherwise wouldn’t out of self-interest.

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 investor’s portfolio constraints. But this is exactly how the ESG investor makes an impact, according to Asness.


“If the virtuous decide they won’t 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 otherwise price.”

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 return.”

While all of this “sucks,” investors hoping to make a positive impact will simply have to “embrace the suck,” according to Asness.

That’s because “without it there is no effect on the world, no good deed done at all,” he said. “Perhaps this necessary sacrifice is why it’s called ‘virtue.’”