ESG Is A Bit Like Technical Analysis ...

Both have their passionate advocates and fierce skeptics within the investment world

Have you heard of that wonderful trading signal that could reliably predict a company’s share price?

All you have to do is to sit and observe when the share price closes above its trendline, and when that happens alongside a high trading volume, that is your entry signal.

Photo by m. on Unsplash

Alternatively, have you heard about how ESG investing can deliver excess returns? The reasoning goes like this: companies that have a better ESG performance tend to deliver higher profits, which translates to better share price performance.

All you have to do is to sit and find a basket of companies with better ESG scores than their peers, and hold on to them. Over the long run, you will end up ahead.

In both cases, we can easily find studies that support these views.

Technical analysts can point to past successful predictions of price moves based on chart patterns to prove that their methods work; ESG investors can also cite studies proving that companies with high ESG scores outperform — within a specific timeframe and for a certain geography.

In both cases, however, we can also easily find studies that debunk these views. The term ESG seems to invoke passionate hatred from certain quarters of the investing community that conclude that it is nothing but a waste of time and resources. Meanwhile, technical analysis has been ridiculed as mostly bulls**t and you can easily find multiple threads on Reddit telling you that.

Coincidentally, both ESG and technical analysis are filled with acronyms and abbreviations. You have your TCFDs, MACDs, RSIs, RCPs and CDPs, just to name a few. Can you tell them apart? We can even turn this into a fun party game for finance bros: ‘TA¹ or ESG?’.

What’s the point I am trying to make here?

In the investment world, there is rarely a one-size-fits-all approach.

Both ESG investing and technical analysis have their fair share of supporters and haters. And it is especially easy to hate on something that seems to violate what you think you know about how finance or investing works.

But the difference in opinions reflects more than what works or what doesn’t. It is a sign that there are so many different personal beliefs, risk tolerances, and worldviews when it come to the world of investing. The endowment fund that has a strict ESG charter has an investment time horizon of 100 years; it therefore has to put its monies into companies that have sustainable business practices. That is very different from a fund manager who fields clients’ questions every three months about how the firm’s exclusion policies have led to underperformance against the market benchmark.

ESG investors may prioritize long-term sustainability and social impact, while technical analysts might focus on short-term price movements and market psychology, but both groups believe they have found a valuable lens through which to view the market.

The persistence of both ESG and technical analysis despite criticism suggests that the investment world is large enough to accommodate multiple worldviews.

In the world of investing, ESG or technical analysis is not everything, but it is also not nothing.

Ever since I started writing this Substack more than a year ago, what struck me the most is that there are so many papers with different findings about whether ESG investing truly leads to alpha. It really depends on which time period you are analyzing and which investment universe or weighting method you are using.

I feel the same when the topic of ESG inevitably comes up in work meetings or casual conversations. Hardcore ESG supporters cannot understand why there should even be hesitation around this topic and the faster we can greenify our portfolio, the better (no matter the costs). On the other hand, ESG skeptics are always annoyed by sustainability teams dictating what they can or they cannot invest in. After all, what do sustainability people know about finance or investing?

Whether you like it or hate it, ESG and technical analysis are now a vital part of finance and investing. In a complex and ever-changing financial landscape, perhaps the most valuable approach is one of continuous learning and thoughtful skepticism. Of course, unless you are Warren Buffett, who is famously not a fan of both ESG and technical analysis.

At the end of the day, you define your own investment success and if you believe that integrating sustainable values is important to you, then go pursue that by all means. If on the other hand, you believe that the indiscriminate selling of controversial stocks present a wonderful bargain opportunity, then by all means add them into your portfolio as well. Instead of spending time hating on the other side, be thankful for the diversity and richness of ideas that present investment opportunities for you. Focus on what works for you as you pursue your own investment success.

1. Which in itself is an abbreviation for technical analysis.