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New Report shows ESG Outperformance could just be a myth

Damian Handzy, Investment Metrics Head of Research & Applied Analytics, discusses a new report comparing ESG outperformance in the U.S. and the EU.

Video Transcript

ZACK GUZMAN: Welcome back to Yahoo Finance Live. As investors continue to care more about where their money is going, we've seen a lot of activists pursue some positive stories, whether it's around climate change or increased diversity on boards. ESG has become a hot topic in the world of investing. Of course, it stands for Environmental, Social, and Governance. And reports have kind of varied around positive factors when it comes to ESG investing. A lot of them point to outperformance.

But a new report digs into whether or not that's true, taking a closer look at stocks both here and in the EU. And for more on that report, to get into the specifics here of the outperformance among ESG-levered investments, happy to bring on Damian Handzy, Investment Metrics Head of Research and Applied Analytics, who is out with that report. And Damian, when you looked in closer to this, when you tease out whether or not ESG does deliver some of those upside returns, what did you find?

DAMIAN HANDZY: So Zack, we wanted to ask a couple of questions. We looked at the EU versus the US. We also wanted to look at whether high scoring ESG stocks outperformed what you can get in the market and whether or not rising ESG scoring companies, so those with kind of ESG momentum, where their scores are improving.

Bottom line-- the US really doesn't show any outperformance. When you adjust the portfolios to have the same sectors as the benchmarks, any perceived outperformance disappears in the US. When you do the same adjustment in Europe, it actually outperforms even more. So you've got a 10%, 12% outperformance in Europe over the last seven or eight years. And the US is basically flat when it comes to ESG. So bottom line, you've made a lot of money investing in high ESG companies in Europe, but that hasn't quite happened in the US yet.

ZACK GUZMAN: Yeah, and when you dig into the differences there as to why that might be, it seems like some of the way that these, I guess, baskets weigh tech stocks is a factor in weighing some of that down.

DAMIAN HANDZY: That's exactly right. A lot of the US indices these days, you know, we've heard a lot of the FAANG stocks, the tech stocks, especially in cap weighted, you know, they keep growing. They keep having a larger portion of the indexes. But that's not necessarily the case when it comes to ESG stocks. So we actually-- we took 1,000 stocks in the US. And we divided them into deciles of ESG score. So we really only look at the very, very best, the top 10% of ESG scoring stocks. And that portfolio underweights the tech stocks, which have been doing so well the last 10 years.

ZACK GUZMAN: What was interesting, though, you wrap up the report with kind of looking at what could happen here in the future, whether that kind of emphasis and investors, I suppose, piling in and revealing a preference for some of these ESG names, if that were to play out as it may have in the EU back here in the US, some of those, that outperformance, might actually come to fruition. So I mean, what are the expectations in terms of, I guess, just the demand here, as we hear more and more people wanting to invest in good conscience?

DAMIAN HANDZY: Yeah, that actually is a big part of the motivation for this study. So our clients are both European investors and US investors, many of whom take a long-term view, so pension funds, endowments, foundations, those sorts of investors. And they're looking for, OK, what's coming down the road 10, 20 years from now?

So we kind of anticipate that if ESG really does take hold in the US the way it has in Europe-- and you got to remember, in Europe, it's gone so far as to actually be regulatory required for disclosures of ESG. If we approach that kind of popularity in the US, we would anticipate ESG portfolios outperforming kind of on par with what they've done in Europe recently.

ZACK GUZMAN: Yeah, it's interesting to see. Obviously, it has been a very big topic for investors here in 2021. No doubt that's probably going to stick around, but we'll see whether or not some of the applause worthy returns manifest themselves back here in the US. But appreciate you coming on here with the data behind all that. Damian Handzy, Investment Metrics Head of Research and Applied Analytics, thanks again for chatting with us.