Great post from Asness regarding ESG. The bottom line is, if you are trying to encourage good behavior, you should expect that your goals do not come free of charge – there should be a cost to total returns.
Pursuing virtue should hurt expected returns. Some have discussed this fact. But, it’s still not widely understood or broadly accepted. This seems to arise from investment managers selling virtue as a free lunch, and from investors who very much want to believe in that story. In particular, and my focus here, accepting a lower expected return is not just an unfortunate ancillary consequence to ESG investing, it’s precisely the point (though its necessity may indeed be unfortunate). As an ESG investor this lower expected return is exactly what you want to happen and really the only way you can effect the change you seek