Study Debunks BlackRock Claims that ESG Funds Did Better During COVID

Larry Fink

So-called environmental, social and governance (ESG) priorities, as applied to investment principles, have seen a massive influx of cash during the COVID-19 pandemic – so much so that influential financial firm leaders have celebrated them as better performers than normal “make-a-profit” funds.

But is that really true?

Mega-firm BlackRock and CEO Larry Fink have called greater attention to ESG, beginning early in 2018 with a letter to more than 1,000 publicly traded companies urging them to elevate issues such as climate change and diversity higher in their considerations as they go about their business.

“Society is demanding that companies, both public and private, serve a social purpose,” he wrote. “To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society.”

CNBC reported earlier this month that the amount of assets in funds that follow ESG “standards” (which are ill-defined and often in the eye of the beholder) exceeded $1 trillion for the first time in history, according to financial research group Morningstar. It followed a second quarter this year that saw an estimated $71.1 billion flow into such funds. Financial service firm UBS said in its own research note that the disruption caused by COVID “highlighted the importance of building sustainable and resilient business models based on multi-stakeholder considerations.”

The statement echoed comments made by Fink a month earlier on CNBC: “The one thing that is very clear in this Covid world … [is that] stakeholder capitalism is only going to become more and more important, and the companies that focus on all their stakeholders — their clients, their employees, the society where they work and operate — are going to be the companies that are going to be the winners for the future.”

And to validate Fink, BlackRock contended in a recent report that ESG funds were more resilient during COVID:

…We have observed better risk-adjusted performance across sustainable products globally in the first quarter of 2020. Morningstar reported 51 out of 57 of their sustainable indices outperformed their broad market counterparts, and MSCI reported 15 of 17 of their sustainable indices outperformed broad market counterparts in the first quarter of 2020—robust across region and index methodology. Further, Morningstar found that 70% of sustainable mutual funds performed in the top half of their respective Morningstar categories.

All the recent analyses and reports seeking to justify sustainable/ESG investment, given all the buildup they have received in recent years, is to be expected. However, an independent academic study of how the funds performed during COVID was released last week, and it counters all the hype-driven fanfare that fund management companies have offered.

Researchers from Canada’s University of Waterloo, Tilburg University in the Netherlands, and New York University’s Stern School of Business reported that despite claims to the contrary by the major financial firms, ESG factors did notinoculate investors against the stock market downturn that was attributed to the COVID crash of the global economy, nor did sustainability priorities aid in the subsequent limited recovery.

“ESG is not an ‘equity vaccine’ against declining share prices in times of crisis,” the report authors stated. “Following all this hyping of ESG as downside risk protection, there was no surprise…that the first quarter of 2020 saw record inflows into sustainable funds.”

Instead, unsurprisingly, the academics found that longstanding traditional standards of business and investment better determined fund performances:

We undertake extensive analyses to investigate this claim and present robust evidence that, once the firm’s industry affiliation and accounting- and market-based measures of risk have been properly controlled for, ESG scores offer no such positive explanatory power for returns during COVID-19. Specifically, ESG is insignificant in fully specified returns regressions for the first quarter of 2020 COVID crisis period, and it is weakly negatively associated with returns during the market’s “recovery” period in the second quarter of 2020.

Industry affiliation, market-based measures of risk, and accounting-based variables that capture the firm’s financial flexibility (liquidity and leverage) and their investments in internally-developed intangible assets together dominate the explanatory power of the COVID returns models.

Nonetheless Fink has steered BlackRock aggressively to ESG-oriented funds, to the point where – as a top influential investor – he has pressured boards and CEOs of major companies to retrain their focus on those priorities. He has allowed the perceived concerns millennials-with-money to determine his firm’s strategies, rather than longstanding investment principles.

Yet for all his alleged “do-goodism” – at the expense of enhancing the portfolios of the workers and pensioners who count on him for their financial futures – Fink has a blind spot when it comes to investment in communist China. As National Legal and Policy Center has reported – and confronted him about – BlackRock is hypocritical by claiming the mantle of “corporate social responsibility” while at the same time pouring billions of dollars into companies controlled by forces that abuse human rights. 

But apparently the millennials aren’t making any noise about it, so if they’re happy, Fink probably is too.