Recent analysis suggests that investors aiming for high returns in the stock market may want to reconsider their focus on Environmental, Social, and Governance (ESG) stocks. According to a report from Kiplinger, the Kiplinger ESG 20 index achieved an average return of only 4.3% over the past year, significantly trailing behind the S&P 500, which delivered an impressive 15.9% return during the same period. This disappointing performance is particularly striking as only six of the fifteen stocks within the Kiplinger ESG 20 managed to outpace the broader market, and a solitary ESG fund managed to outperform the S&P 500.
The year was fraught with challenges for ESG investing, exacerbated by social media pressures that prompted companies to distance themselves from their previously stated ESG commitments. Despite these challenges, it is important to note that the decline in the momentum of Diversity, Equity, and Inclusion (DEI) efforts, which gathered steam during the presidency of Donald Trump, is not the primary factor behind ESG’s underperformance. In fact, the broader challenges facing ESG investments have been accumulating over the past few years.
Morningstar, a prominent investment research firm, reported that 2023 marked the worst calendar year ever for ESG stocks, revealing a troubling trend of lagging performance that has persisted into 2022 and 2023. Morningstar identified high interest rates and supply chain disruptions as key factors contributing to this underperformance, although these issues have also affected a wide array of stocks, small businesses, and consumers alike.
The implications of this underperformance have led some investors to seek alternative assets that promise the highest potential returns. However, traditional ESG frameworks often exclude several high-growth industries due to their inherent environmental concerns. This raises questions about the criteria for what qualifies as an ESG stock when tech giants, particularly in artificial intelligence (AI), appear on lists such as the Kiplinger ESG 20.
For instance, both Microsoft and Nvidia, known for their significant energy consumption due to extensive computing power, have made the Kiplinger list. Microsoft’s commitment to becoming carbon negative and water positive by 2030 has allowed it to maintain its ESG status, while Nvidia’s governance practices have also earned it a spot. Critics argue that the intersection of ESG factors with the burgeoning success of AI firms is perplexing, as the balance between environmental sustainability and technological advancement remains contentious. The argument is further complicated by the notion that Nvidia’s governance model may not have yielded the same success if applied to a less dynamic industry, such as retail.
As investors navigate these complexities, the debate surrounding the viability and efficacy of ESG investing continues. Many are left pondering whether the potential for high returns can really coexist with a commitment to responsible investing.
