A Custom ESG Portfolio Could Solve the Apples to Oranges Comparison

A Custom ESG Portfolio Could Solve the Apples to Oranges Comparison

Necessity is the mother of invention – perhaps that’s why JP Morgan Chase recently bought OpenInvest, a San Francisco-based start-up that provides financial advisors the technology to customize a portfolio of ESG stocks.  Rather than put their clients into a self-styled ESG fund, advisors can use OpenInvest to create a personalized portfolio of stocks that more accurately reflects their clients’ values using data from nearly three dozen sources.

PRI has long been a critic of ESG funds – funds that purport to choose stocks based on their impact on the environment, social responsibility, or the way they govern — because the investment strategies of ESG funds are all over the map.  As a result, judging the performance of these funds against one another and against the broader market is a tough proposition.  Nevertheless, the public has flocked to these funds believing that they can do well and do good. But do these funds really deliver?

Wall Street Journal reporter Michael Wursthorn cautions investors, “…long-term returns aren’t certain. Last year, three out of four sustainable funds beat the averages for their broader categories,” according to Morningstar, a mutual fund rating firm. But much of that outsize performance, writes Wursthorn, “owes to sustainable funds being populated with technology stocks, a general stock-market favorite in 2020 that outperformed nearly all other sectors. History suggests that performance may be more of an outlier than the start of a permanent trend.”

Wursthorn cites PRI senior fellow Wayne Winegarden, who did the math in 2019 and found that $10,000 invested in an ESG fund would be about 44 percent smaller compared with an investment in an S&P 500-tracking fund over a 10-year period.

What’s intriguing about OpenInvest is that it allows the financial advisor to go that extra step – build a portfolio of companies that more accurately aligns with a client’s values.

“Through technology, it’s now possible, for example, to give people granular control over how their values are implemented,” co-founder Connor Murray said in an interview with CNBC. “It’s not just whether or not you care about gender equality, but whether you want to tilt more towards maternity leave or gender pay gap or board compensation, any of the things that matter to the client.”

That’s pretty nifty.  Now investors don’t have to worry about making apples to oranges comparisons among ESG labeled funds because they know what they’re really getting.  And some investors may be willing to accept lower returns knowing that they truly are investing in companies that are advancing their values.

It doesn’t look like OpenInvest is available to the broader investing public, but perhaps some other start-up will come up with a tool for the individual investor. When that day comes, I will look out for companies that don’t take corporate welfare, don’t have big lobbying staffs, and donate to free-market think tanks.

Rowena Itchon is senior vice president of the Pacific Research Institute.

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