2020: Four Myths Busted

Baruch Lev

By Baruch Lev

By Baruch Lev

2020 was a calamitous year, but you know all about that. What you may not know is that four widely held beliefs among investors were empirically debunked in 2020. Here they are:

ESG Is Not An “Equity Vaccine.”
ESG (corporate environmental, social, and governance activities) is widely touted as “the best of all worlds.” Not only does it benefit the environment and society, it’s also good for shareholders. Thus, for example, Morningstar referred to ESG as an “equity vaccine” against the pandemic crash, claiming that 24 of 26 ESG-titled index funds outperformed their closest conventional counterpart funds. BlackRock (BLK) reported superior performance across sustainable investment products globally. And MSCI (MSCI) claimed that all four of their ESG-oriented indices outperformed the broad market.

Well, not so fast. With three capable colleagues, I examined the returns on all U.S. stocks in the height of the pandemic: January through March of 2020. (See “ESG Didn’t Immunize Stocks Against the Covid-19 Market Crash,” by Demers, Hendrickse, Joos, and Lev.) When we just correlated stocks’ returns (market performance) during the first three months of 2020 with the ESG ratings of the issuing companies, we found a positive, though not very high, correlation, seemingly supporting the claim that ESG was a “covid vaccine.” However, when we did a more serious research, adding ESG ratings to various corporate attributes, such as liquidity, profitability, debt, etc., ESG lost completely its statistical significance. In fact, relative to other factors, particularly investment in intangibles, ESG contributed a trifling 1% to stock performance during the height of covid. In the second quarter of 2020, ESG was negatively correlated with returns.

Read the full Seeking Alpha article.

Baruch Lev is the Philip Bardes Professor of Accounting and Finance.