“I believe that ESG is, at its core, a feel-good scam that is enriching consultants, measurement services and fund managers, while doing close to nothing for the businesses and investors it claims to help, and even less for society,” Damodaran wrote in his blog.
He said as Russian hostilities in Ukraine shake up markets, the weakest links in the ESG chain are being exposed, and a moment of reckoning is arriving for the concept.
To prove his point, the professor of finance at Stern School of Business at New York University proposed a thought experiment.
“If China had invaded Taiwan, do you think that companies would have been as quick to abandon their Chinese holdings and business? Do you think that investment funds would have been so quick to write off their Chinese holdings? On a more personal level, would you be willing to give up all things “Chinese”, as quickly as you were willing to give up drinking Russian vodka? They are hypothetical questions, but I think I know the answer,” he said.
Amid concerns about climate change and social justice, ESG investing is fast becoming the hottest investment theme globally. According to Bloomberg Intelligence estimates, ESG assets are poised to reach $41 trillion by the end of this year and exceed $53 trillion by 2025.
On the outperformance of ESG funds in the last decade, Damodaran argued that almost all of the outperformance could be attributed to ESG’s tech focus and sector concentrations. “As the market has shifted, and ESG-based strategies are now underperforming, ESG investment fund managers are scrambling, trying to explain to clients why this is just a passing phase, and that good days are just around the corner.”
The renowned academician predicts that once the components of ESG that matter get priced in, ESG-constrained funds will deliver lower returns than funds that don’t operate under those constraints.
