Practical analysis for investment professionals
08 January 2021

“ESG, Motherhood, and Apple Pie”? Seven ESG Policy Questions

“Motherhood and apple pie” is an idiom commonly used to “represent things that most Americans consider to be very good and important.” Over time, other words like“the flag” and “baseball” have been appended to this phrase but none have really stuck. Now there is another contender: ESG.

Who would argue that nothing’s wrong with companies that exhibit bad environmental, social, and governance (ESG) practices? No one!

But in investing, the answer is not so straightforward. Should investors avoid or engage with companies with low ESG scores? What are the pros and cons of such approaches? Who should rate firms on their ESG practices anyway? Is it even feasible for all companies to be “good”?

These are among the relevant questions investors should consider when deciding where they stand on ESG. Here, we address seven such questions to help investors devise the ESG policy position that is right for them.

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1. Is there a performance penalty for ESG investing?

Skeptics believe any ESG constraint reduces the universe of eligible securities, which would, by definition, incur a potential performance penalty. This argument has theoretical merit. But at a practical level, there are significant offsetting factors:

  • There is a positive relationship between ESG-type variables and corporate performance, according to most empirical evidence. A survey of 159 studies found that 63% show a positive relationship, 22% a neutral or mixed relationship, and only 15% a negative relationship.
  • Our research demonstrates that companies with strong long-term ESG track records slightly outperformed the broad market benchmark, and high-ESG portfolios exhibited less volatility than their low-ESG peers.
  • ESG data can help facilitate better decision making by improving assessments of company quality and value.
  • ESG investing has significant momentum behind it that is not likely to dissipate anytime soon. To the extent this tailwind persists, it will have a positive self-fulfilling effect on ESG performance.

So a case can be made that concerns about ESG investing incurring a performance penalty are overstated.

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2. Is ESG investing consistent with fiduciary responsibility?

Trustees have rightfully asked whether ESG considerations conflict with fiduciary duty. Generally speaking, trustees have to base their decisions on the best interests of their beneficiaries. This responsibility is most clearly outlined for ERISA investors but it applies to non-ERISA investors too.

In the last few years, the US and European governments have offered guidance on ESG. The latter have consistently supported ESG investing, not only endorsing the practice but also declaring that “not” considering ESG factors is inconsistent with fiduciary duty.

The US guidance has been more ambivalent and reflects the differing views of the two dominant political parties. The Barack Obama administration permitted consideration of ESG factors so long as it was in the beneficiaries’ interests. The Donald Trump administration was more skeptical of ESG factors. The takeaway is that ESG investing should stand on its own merits without governmental support and must demonstrate that it can generate competitive returns.

As we’ve shown, evidence suggests that ESG can meet these standards and thus can be consistent with fiduciary responsibility. Of course, that does not imply that ESG integration should be mandatory.

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3. Should companies be evaluated against their industry peers or the broader universe?

There is no consensus on what constitutes a good company from an ESG perspective. Is an energy firm automatically “bad” because its products pollute the environment? What if that company has a concrete plan to shift to renewables? Is a nuclear utility good because it is not a big carbon polluter or bad because of the tail risk of a Fukushima-type disaster? Is Facebook better than Exxon because of its carbon neutrality pledge or worse because of its data privacy policies?

Some of these questions simply reflect ESG’s growing pains as investors come to grips with the related risks and opportunities. But others are more fundamental and philosophical in nature and require upfront soul searching. Investors have to decide what ESG criteria they will use to judge companies and whether to evaluate them relative to their industry counterparts or to the broader universe.

An in-sector approach provides useful, apples-to-apples comparisons and eliminates the impossible Facebook-to-Exxon comparisons. But such approaches may not serve mission-oriented investors who often have exclusionary screens on certain industries. Many of these investors may take collateral benefits beyond the returns ESG investments generate into account in making their decisions.

All other investors, especially those governed by ERISA, would find this approach unacceptable. Such investors might be better served by holistic strategies that incorporate ESG factors as part of the overall investment process.

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4. Is it logical to lump E, S, and G together?

Environmental factors are most relevant to only a small cohort of companies, social factors affect a broad swath of firms, and governance factors affect all.

The table below presents sector-by-sector data for three common environmental factors for S&P 500 firms. Those sectors that compose more than 10% of the total universe are bolded.


ESG Factors by Sector

SectorEnergy UsedWater UsedCO2 Emitted
Communication Services2% 0%1%
Consumer Discretionary5%3%3%
Consumer Staples6%1%4%
Energy37%3%19%
Financials0%0%0%
Health Care1%0%1%
Information Technology2%0%1%
Industrials22%0%13%
Materials24%7%12%
Real Estate1%0%1%
Utilities1%86%44%

Source: High Pointe Capital Management. Based on raw data from Refinitiv Eikon. Underlying data are as reported by companies. Those that do not provide the data are excluded from calculations for the purpose of this exhibit. Based on S&P 500 constitution as of 30 November 2020.


The sector exposures to environmental factors vary widely. Energy, Industrials, Materials, and Utilities account for 83% of energy used, 96% of water used, and 88% of CO2 emitted. By market capitalization, these sectors constitute only 17% of the index.

By contrast, social and governance issues do not exhibit much sector differentiation. The table below shows the relevant data for two social and two governance variables.


Social and Governance Factors by Sector

SectorGender Diversity at Senior LevelsCultural Diversity at Board LevelDirectors Who Are IndependentCompanies with Separate Chair and CEO Roles
Communication Services28%14%79%62%
Consumer Discretionary29%9%82%66%
Consumer Staples30%16%83%77%
Energy20%22%85%76%
Financials30%17%85%72%
Health Care29%16%85%73%
Information Technology22%16%84%55%
Industrials23%14%86%68%
Materials22%17%88%61%
Real Estate27%14%83%65%
Utilities23%8%89%70%

Source: High Pointe Capital Management. Based on raw data from Refinitiv Eikon. Gender Diversity is based on average percentage of female representation at manager, executive, and director levels. Based on S&P 500 holdings as of 30 November 2020.


There are two major implications from this data.

  • Rating agencies can distinguish themselves by customizing their data collection by sector rather than taking a one-size-fits-all approach. This may also earn them some goodwill from companies that would otherwise have to gather and report data that is not material for their business. Indeed, a German software company won a recent court case against a rating agency that had penalized the firm for not providing certain environmental data.
  • Any portfolio built around minimal environmental impact will likely have much different sector exposures than its benchmark. Social or governance-oriented portfolios, however, will not diverge as much.
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5. Is it better to boycott or engage with ESG-deficient companies?

Boycotting is easy, engagement is hard. But the potential rewards of the latter are more meaningful and direct.

We have documented that many ESG portfolios overweight technology and underweight “problematic” sectors like energy. These portfolios have benefitted from strong tech performance and subpar energy returns in recent years. But that trend may not last forever and investors need to be prepared for a shift.

Active engagement beyond proxy voting is probably not feasible for small investors, among others. But larger investors should get involved to show their commitment to ESG.

6. What’s the role of the government and rating agencies?

Inconsistent guidance is worse than no guidance at all. So government ESG policies should not change from one administration to another.

ESG rating agencies are the self-appointed arbiters of ESG compliance. They are meeting and, in some cases, creating their clients’ needs. Competition among these entities will ultimately determine which standards become the norm. In the meantime, ESG raters can better serve their clients by doing the following:

  • Rank companies by both their industry peer group and the overall universe so clients can choose which rating best fits their goals.
  • Find a way to reduce the large-cap bias inherent in ESG ratings. This bias is caused by the reliance on self-reporting. Large firms have more resources to dedicate to these efforts and thus have a built-in advantage.

UN-PRI has been instrumental in promoting ESG investing to counter climate change. But its increasingly complex disclosure requirements suffer from a similar large-organization bias.

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7. Does history offer any guidance about ESG investing’s potential impact?

The fossil fuel industry has long been a target of activists and regulators. Its plight is reminiscent of the tobacco sector several decades ago, Faced with numerous product liability lawsuits and rising taxes on their products, tobacco companies had to curtail their marketing efforts and demand fell.

But the industry’s decline was a slow one in the United States. Tobacco was addictive and there were no alternatives, so customers did not so easily break the habit. And they were brand loyal. As a result, the sector had amazing pricing power, and tobacco companies have continued to generate prodigious cash flows despite lower unit sales.

Fossil fuel companies lack similar advantages: Their product is a commodity with little brand loyalty. They have pricing power only when cyclical demand is high relative to supply. One factor in their favor: Their product is essential, not discretionary like tobacco.

The fossil fuel sector’s future depends on how quickly renewables become cost competitive and reliable. The production costs of renewables are already competitive. But the reliability of alternatives remains an issue. So investors should keep a close eye on it to gauge the energy sector’s risks and opportunities.

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“Motherhood and apple pie” is a virtue-signaling phrase and so is ESG. But ESG investing can and should stand on its own merit. It doesn’t and shouldn’t need government support.

A holistic integration of ESG data that doesn’t sacrifice returns stands the best chance of being accepted by fiduciaries. That is the key to achieving widespread ESG adoption and to generating the greatest impact.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Image credit: ©Getty Images / Malkovstock

About the Author(s)
Gautam Dhingra, PhD, CFA

Gautam Dhingra, PhD, CFA, is the founder and CEO of High Pointe Capital Management, LLC. He developed the firm's pioneering investment approach based on the concept of Franchise Quality, and under his leadership, High Pointe has built an enviable investment performance record. Dhingra served on the faculty member at Northwestern University’s Kellogg School of Management for two years. In this role, he designed and taught The Business of Investing course in the school’s MBA curriculum. His research interests include ESG investing and valuation of intangible assets. He holds a PhD in finance, with specialization in investments and econometrics, from the University of Florida’s Warrington College of Business. At Warrington, he taught two courses in securities analysis and derivatives.

1 thought on ““ESG, Motherhood, and Apple Pie”? Seven ESG Policy Questions”

  1. van de Werve de Schilde says:

    A very good piece.
    To accelerate the greening of the economy, investments in green technologies and infrastructure projects should be incentivised. From that perspective I take the view that ESG investing would benefit from government support, eg in the form of tax incentives.
    Also to avoid greenwashing, it would help defining what green means.
    Leaving it to the market is not sufficient.

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