Author Topic: What are your thoughts on sustainability index funds/ ESG in general?  (Read 1199 times)

vinnybagodonuts

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I can't help but notice that over the last 10 years, the TDA/retirement portfolio sustainability funds my company offers have done just as well as the total market funds, if not better. This prompted me to do a little homework. Looking into ESG/sustainability index funds, I found that Fidelity's FITLX and Vanguard's ESGV did very well last year. Now they are still new (founded 2018/2019) but they made 31% and 33% returns, respectively, in 2019. Do you think this will continue or is it still better to stick with total stock market index funds.

I know last year was a great year for the market, but I feel like new investors/ the public in general are shifting toward sustainability, so in theory, wouldn't these companies maybe outperform their peers in the coming years?


seattlecyclone

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Re: What are your thoughts on sustainability index funds/ ESG in general?
« Reply #1 on: January 24, 2020, 02:05:00 PM »
They may outperform, or the expectation of increased profits for these companies may already be priced in. What do you know that Wall Street doesn't? If the answer is "nothing," you probably shouldn't expect to beat them at their own game.

vinnybagodonuts

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Re: What are your thoughts on sustainability index funds/ ESG in general?
« Reply #2 on: January 24, 2020, 02:53:51 PM »
They may outperform, or the expectation of increased profits for these companies may already be priced in. What do you know that Wall Street doesn't? If the answer is "nothing," you probably shouldn't expect to beat them at their own game.

Well, it is one thing if increased profits are already priced in. But I'm talking about, let's say in the extreme hypothetical, in the next 10-20 years the companies that are not sustainable/ continue to do worse due to changing trends, millennials don't want to invest in etc. (oil and cigarette related companies come to mind) thus begins to drag down the total stock market, while sustainability indexes continue to do great.

I know there is no way to predict when and if this will be the case, but I just feel society is moving in this direction.

As for the Wall Street argument, I think Matthew McConaughey explained it best: https://www.youtube.com/watch?v=wM6exo00T5I

1:30 - 3:00

Buffaloski Boris

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Re: What are your thoughts on sustainability index funds/ ESG in general?
« Reply #3 on: January 24, 2020, 03:13:48 PM »
I think the argument can be made that in the long run, non-ESG or anti-ESG stocks will do better. ESG sure sounds great, but if the idea of investing is to gain returns, then I'm going to shy away from them.

Let's use cigarettes as an example.  These tobacco companies will eventually go away.  Key word: eventually.  People will continue to smoke for the foreseeable future, albeit at a decreasing rate. In the mean time these companies are throwing off dividends rather nicely.  So if you assume that at some point your stock will be worthless, what you want in the mean time is a very robust dividend stream and well-managed decline.  Which is exactly what companies like Altria are doing.  In a way these stocks operate almost like an annuity.       

EvenSteven

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Re: What are your thoughts on sustainability index funds/ ESG in general?
« Reply #4 on: January 24, 2020, 03:24:01 PM »
They may outperform, or the expectation of increased profits for these companies may already be priced in. What do you know that Wall Street doesn't? If the answer is "nothing," you probably shouldn't expect to beat them at their own game.

Well, it is one thing if increased profits are already priced in. But I'm talking about, let's say in the extreme hypothetical, in the next 10-20 years the companies that are not sustainable/ continue to do worse due to changing trends, millennials don't want to invest in etc. (oil and cigarette related companies come to mind) thus begins to drag down the total stock market, while sustainability indexes continue to do great.

I know there is no way to predict when and if this will be the case, but I just feel society is moving in this direction.

As for the Wall Street argument, I think Matthew McConaughey explained it best: https://www.youtube.com/watch?v=wM6exo00T5I

1:30 - 3:00

If I were you I would stop trying to time the market and stop trying to outsmart the market. It is really easy to get market returns, and market returns are pretty darn good.

If you are hell bent on trying to beat the market, I would suggest subscribing to my stock picking newsletter. It's a measly $50.00 per month, but it is guaranteed* to beat the market by at at least 5% in the long run.

*not guaranteed

vinnybagodonuts

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Re: What are your thoughts on sustainability index funds/ ESG in general?
« Reply #5 on: January 25, 2020, 07:45:17 AM »
I think the argument can be made that in the long run, non-ESG or anti-ESG stocks will do better. ESG sure sounds great, but if the idea of investing is to gain returns, then I'm going to shy away from them.

Let's use cigarettes as an example.  These tobacco companies will eventually go away.  Key word: eventually.  People will continue to smoke for the foreseeable future, albeit at a decreasing rate. In the mean time these companies are throwing off dividends rather nicely.  So if you assume that at some point your stock will be worthless, what you want in the mean time is a very robust dividend stream and well-managed decline.  Which is exactly what companies like Altria are doing.  In a way these stocks operate almost like an annuity.       

You raise some valid points. The end goal is profitability and I can also see sustainability working against that goal. Cigarette/oil will probably continue to do ok in the short to medium term.

BECABECA

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Re: What are your thoughts on sustainability index funds/ ESG in general?
« Reply #6 on: January 25, 2020, 08:18:26 AM »
A few months ago I decided the same thing, and shifted my retirement accounts from VTSAX to VFTAX. I havenít shifted my after tax accounts though, since thatíd be a massive taxable event if I did.

In this other thread, @TomTX made some really good points that influenced my decision:
https://forum.mrmoneymustache.com/investor-alley/are-index-funds-unethical/msg2464669/#msg2464669

You can compare the 10 year history of VTSAX vs the 10 year history of the institutional shares VFTNX (the admiral shares only have a 1 year history). The sustainability fund beat the total over the last 10 years, and if you look at the trend of how institutional investors are divesting from oil companies, it seems this performance will continue:
Quote
In 2014, investors with a total $52bn in assets under management had agreed to shed their fossil fuel holdings. Now that group represents more than $11tn in total assets
https://www.ft.com/content/4dec2ce0-d0fc-11e9-99a4-b5ded7a7fe3f
« Last Edit: January 25, 2020, 08:23:22 AM by BECABECA »

Buffaloski Boris

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Re: What are your thoughts on sustainability index funds/ ESG in general?
« Reply #7 on: January 25, 2020, 08:26:42 AM »

You raise some valid points. The end goal is profitability and I can also see sustainability working against that goal. Cigarette/oil will probably continue to do ok in the short to medium term.

Each industry is different. I think cigs will do fine short to medium term, oil less so. I havenít found a set of oil/energy companies Iím all that wild about. Thermal coal is a dead industry walking. Metallurgical coal still has some life in it, but not much.

What I think the ESG investors are missing is that theyíre implicitly stock-picking based on largely non economic factors. They want to feel good about their portfolio. Great for you if thatís your motivation and what keeps you invested. It just doesnít do it for me, and what I consider to be ďsocially conscientiousĒ investment is probably radically different from how most ESG investors see it.

In the end Iíd rather just donate time and money to the issues I care about.

BECABECA

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Re: What are your thoughts on sustainability index funds/ ESG in general?
« Reply #8 on: January 25, 2020, 08:39:02 AM »

You raise some valid points. The end goal is profitability and I can also see sustainability working against that goal. Cigarette/oil will probably continue to do ok in the short to medium term.

Each industry is different. I think cigs will do fine short to medium term, oil less so. I havenít found a set of oil/energy companies Iím all that wild about. Thermal coal is a dead industry walking. Metallurgical coal still has some life in it, but not much.

What I think the ESG investors are missing is that theyíre implicitly stock-picking based on largely non economic factors. They want to feel good about their portfolio. Great for you if thatís your motivation and what keeps you invested. It just doesnít do it for me, and what I consider to be ďsocially conscientiousĒ investment is probably radically different from how most ESG investors see it.

In the end Iíd rather just donate time and money to the issues I care about.

I donít think thatís the motivation for the institutional investors at all. I think they see oil companies would be extremely unprofitable overnight if (or when) they are made to pay the real total cost of the product, the environmental cost that is currently being offloaded onto the public. Same with tobacco companies, with the health cost. Maybe you donít believe that the U.S. government will eventually regulate these, but I bet you can imagine Europe doing so. If oil and tobacco suddenly have their lifecycle costs factored into the cost of their products for the European market, then I could see how the demand for these products would quickly evaporate in Europe. And if global demand reduced, even if it didnít in some lagging countries, itíd still have a big impact on the profitability of those companies.

Buffaloski Boris

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Re: What are your thoughts on sustainability index funds/ ESG in general?
« Reply #9 on: January 25, 2020, 09:29:27 AM »

You raise some valid points. The end goal is profitability and I can also see sustainability working against that goal. Cigarette/oil will probably continue to do ok in the short to medium term.

Each industry is different. I think cigs will do fine short to medium term, oil less so. I havenít found a set of oil/energy companies Iím all that wild about. Thermal coal is a dead industry walking. Metallurgical coal still has some life in it, but not much.

What I think the ESG investors are missing is that theyíre implicitly stock-picking based on largely non economic factors. They want to feel good about their portfolio. Great for you if thatís your motivation and what keeps you invested. It just doesnít do it for me, and what I consider to be ďsocially conscientiousĒ investment is probably radically different from how most ESG investors see it.

In the end Iíd rather just donate time and money to the issues I care about.

I donít think thatís the motivation for the institutional investors at all. I think they see oil companies would be extremely unprofitable overnight if (or when) they are made to pay the real total cost of the product, the environmental cost that is currently being offloaded onto the public. Same with tobacco companies, with the health cost. Maybe you donít believe that the U.S. government will eventually regulate these, but I bet you can imagine Europe doing so. If oil and tobacco suddenly have their lifecycle costs factored into the cost of their products for the European market, then I could see how the demand for these products would quickly evaporate in Europe. And if global demand reduced, even if it didnít in some lagging countries, itíd still have a big impact on the profitability of those companies.

Institutional investors I believe have mixed motives and a longer than average time horizon. It all depends on the institutional investors. Some pension funds are very much into what they define as socially conscious investing. Others couldnít care less. Much the same as individual investors.

The key issue though is time horizons. All of the following industries I believe to have a limited future and will likely be drastically smaller in my lifetime and might disappear entirely: tobacco, coal, natural gas, and oil. If youíre looking for them to persist well into the future, youíll be disappointed. But if your time horizon is reasonably short, they can be a reasonable investment. And full disclosure, to a certain extent I do.

As countries trying to assess all downstream costs,  I donít see it happening in any big way in the near future. Over time, maybe.

TomTX

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Re: What are your thoughts on sustainability index funds/ ESG in general?
« Reply #10 on: January 25, 2020, 09:53:56 AM »
BlackRock is an enormous investment firm ($7Trillion in assets) and recently announced they are starting to divest fossil fuels, starting with coal.

It's not quite that simple - it looks like the first areas are the actively managed funds, and offering ESG equivalents to current indexes.

https://arstechnica.com/science/2020/01/major-investment-firm-to-prioritize-sustainability-back-off-coal/

BobTheBuilder

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Re: What are your thoughts on sustainability index funds/ ESG in general?
« Reply #11 on: January 25, 2020, 10:20:59 AM »
I agree that in a world without regulations, the companies not being socially / environmentally responsible would make more profit.

But I would also argue that the regulations will tighten up in a way that is not priced in, and carbon fuel ressources will be worthless by 2050. Which matches my investment horizon.

So I changed a part of my savings plan from MSCI World to MSCI Low Carbon Leaders. There is little difference in it right now with Low Carbon outperformin. But burning coal and oil will simply be a) forbidden by 2050 in most conuntries and b) not be profitable since the cost of renewable energies is falling and will keep falling.


TomTX

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Re: What are your thoughts on sustainability index funds/ ESG in general?
« Reply #12 on: January 25, 2020, 12:25:14 PM »
I agree that in a world without regulations, the companies not being socially / environmentally responsible would make more profit.

But I would also argue that the regulations will tighten up in a way that is not priced in, and carbon fuel ressources will be worthless by 2050. Which matches my investment horizon.

I think it will be a lot faster than that. Battery prices continue to drop - once equivalent EVs have a purchase price cheaper than fossil cars, it's pretty much the beginning of the end. Different projections put that date in the 2022-2025 timefame. Battery factory construction plans worldwide are massive, and continue to grow rapidly.

Wind and solar already undercut the operating costs of coal in most of the USA (ie, you finance construction of new wind/solar, the payments are less than just the cost of fuel/labor/maintenance on the existing coal plant). Renewables planned to come online in Texas in 2020 are significantly up from 2019, and much higher for 2021/2022, especially solar.
« Last Edit: January 25, 2020, 01:12:20 PM by TomTX »

Buffaloski Boris

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Re: What are your thoughts on sustainability index funds/ ESG in general?
« Reply #13 on: January 25, 2020, 05:35:25 PM »
I agree that in a world without regulations, the companies not being socially / environmentally responsible would make more profit.

But I would also argue that the regulations will tighten up in a way that is not priced in, and carbon fuel ressources will be worthless by 2050. Which matches my investment horizon.

I think it will be a lot faster than that. Battery prices continue to drop - once equivalent EVs have a purchase price cheaper than fossil cars, it's pretty much the beginning of the end. Different projections put that date in the 2022-2025 timefame. Battery factory construction plans worldwide are massive, and continue to grow rapidly.

Wind and solar already undercut the operating costs of coal in most of the USA (ie, you finance construction of new wind/solar, the payments are less than just the cost of fuel/labor/maintenance on the existing coal plant). Renewables planned to come online in Texas in 2020 are significantly up from 2019, and much higher for 2021/2022, especially solar.

I think 2050 is about right for the beginning of the end for carbon. Thermal coal is already a dead industry walking; its cheaper to build out solar or wind. BUT not everyone is going to do it immediately, particularly in the developing world. Existing infrastructure will slowly be replaced. 

Oil will linger longer due to transportation and plastics. Adoption of BEV is very minimal in the US, and given that the average car is kept 8-10 years, thatís going to change slowly. If I go walk around a parking lot in my urban East coast city, less than 2 of 100 cars are BEV. Possibly less than 1 in 100. BEVs are uncommon enough to turn heads.

Less than 15% of the world population is in Europe and North America. Weíre not driving this. The developing world is.

js82

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Re: What are your thoughts on sustainability index funds/ ESG in general?
« Reply #14 on: January 25, 2020, 06:25:54 PM »

Oil will linger longer due to transportation and plastics. Adoption of BEV is very minimal in the US, and given that the average car is kept 8-10 years, thatís going to change slowly. If I go walk around a parking lot in my urban East coast city, less than 2 of 100 cars are BEV. Possibly less than 1 in 100. BEVs are uncommon enough to turn heads.

Less than 15% of the world population is in Europe and North America. Weíre not driving this. The developing world is.

They most certainly are, but the same primary driver is in play - relative cost.   The current situation in the US illustrates that even the moderately well-off will balk at purchasing a "Clean" vehicle that costs $5-10k more than the conventional alternative.  Once EV's reach cost parity they become a compelling alternative to the combustion engine.

And once we reach cost parity I fully expect the rest of the world will leap to adopt EV's far quicker than the United States will because of relative national attitudes towards environmental issues.

TomTX

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Re: What are your thoughts on sustainability index funds/ ESG in general?
« Reply #15 on: January 25, 2020, 06:31:25 PM »
Less than 15% of the world population is in Europe and North America. Weíre not driving this. The developing world is.

Lots of people in the developing world are thrilled at an electric-assist bicycle. Soon, electric scooters will be price-comparable to gasoline. Once they're cheaper - why get a gasoline scooter which will cost more to buy and more to run?


On the coal front: Coal's share of electricity dropped 18% last year in the USA, same in Texas (ERCOT). We're already lower than EIA projected for 2050. Admittedly, every EIA and IEA long range projection for coal, wind and solar have been disproven within 2 years for something like 14 years now (with coal reductions and wind/solar increases all being underestimated)
« Last Edit: January 25, 2020, 06:34:28 PM by TomTX »

BobTheBuilder

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Re: What are your thoughts on sustainability index funds/ ESG in general?
« Reply #16 on: January 26, 2020, 02:33:19 PM »
I agree that in a world without regulations, the companies not being socially / environmentally responsible would make more profit.

But I would also argue that the regulations will tighten up in a way that is not priced in, and carbon fuel ressources will be worthless by 2050. Which matches my investment horizon.

I think it will be a lot faster than that. Battery prices continue to drop - once equivalent EVs have a purchase price cheaper than fossil cars, it's pretty much the beginning of the end. Different projections put that date in the 2022-2025 timefame. Battery factory construction plans worldwide are massive, and continue to grow rapidly.

Wind and solar already undercut the operating costs of coal in most of the USA (ie, you finance construction of new wind/solar, the payments are less than just the cost of fuel/labor/maintenance on the existing coal plant). Renewables planned to come online in Texas in 2020 are significantly up from 2019, and much higher for 2021/2022, especially solar.

That was a very cautious statement, like in 5 is smaller than 7,000,000 :-)
Personally, I think it could go a lot faster at least in the western world. Maybe even in the emerging markets.

MustacheAndaHalf

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Re: What are your thoughts on sustainability index funds/ ESG in general?
« Reply #17 on: January 27, 2020, 04:52:54 AM »
In 1976, indexing was considered a joke - it had no impact on people's decisions.  Now people worry that most of the market might be held in index funds.

I take the same view on ESG.  For the past few years, I've viewed it as ineffective.  An oil company doesn't care when an individual investor avoids buying it.  But when multiple companies have large ESG firms - and CEOs in Davos are talking about climate change - it suggests a change in thinking.  It could be worthwhile to invest in ESG, acknowledging the returns may differ from the market.

But try not to let that be a substitute for donating to worthy causes, and voicing / voting your opinion.