ESG Orphans October 2022 Recap: Gains Led by Energy and Defense

The ESG Orphans ETF $ORFN gained 13.2% in October tracking the ESG Orphans Index that gained 13.3% in the month. This compares to the SPX Index gain of 8%, the NDX 100 gain of 4%, the Russell 2000 gain of 11%. Additionally, the MSCI ESG Focus Index gained 8% while the Russell 2000 Value Index gained 12.5% and the SPX Midcap Index gained 10.4%

For the Orphans Index, the energy component provided the major attribution as the proxy the Energy Select Sector Index returned 24.8% in October. The Orphans Index is 25% Energy. Weapons appreciated well too with the proxy of the Aerospace and Defense Index gaining 17.7% in the month. The Orphans are 21% weighted to weapons. Utilities (nuclear) lagged in the month gaining just 2% as measured by the Utilities Sector Index. Orphans are 25% weighted to nuclear energy/utilities. Tobacco gained strongly while alcohol lagged in the month for the Orphans. But the overall price action is encouraging with Energy and Weapons leading the way.

Clearly the ESG Orphans Index outpaced most of those respective Indices in October. When we zoom out and look at them over 3mos and 6mos, we see the same thing.

Indices Over 3 mos:
Indices over 6 mos:

The plan is coming together. The outperformance of the ESG Orphans is notable on 1mo, 3mo, and 6mo. The $ORFN has been trading for just under 6mos. The ESG Orphans Index with all the components and a longer history, has a YTD performance figure of +15.3% versus the SPX -19.5%, the NDX -31%, and the Russell 2000 -18.6%. The relative outperformance is quite spectacular.

We are pleased that our thesis is playing out. It seems as if higher rates and the end of easy money is now causing some retrenchment in the ESG world. Perhaps too many hires were made in non-profitable areas of the ESG companies as part of the malinvestment and misallocation of capital we see during times of capital constraints. GOOGL said that going forward they were going to hire less and cut cost. We read this as meaning they have too many ESG-related hires and not enough productive hires. GOOGL is a top weight in many ESG funds and down 38%YTD

AMZN is another ESG fund friendly stock, appearing in 75-80% of ESG funds despite being one of the biggest carbon footprints in the world outside of the energy producers. 95% of Wall Street analysts have AMZN as a “buy” and it’s down 43% YTD. Compare that to the ESG Orphan XOM which nobody owns and has been villainized by the ESG world and is up 80% YTD. It’s astonishing really.

We think this trend continues. As we spoke with Aswath Damodaran, NYU’s “Dean of Valuation,” about skepticism in ESG recently (please see our YouTube interview with him “Emptiness in ESG,” the link is on our website) he believes once the bear market really takes hold, recent ESG hires will be let go and PnL will come more into focus. That’s where we are now.

We riff on the Mike Tyson line, “Everyone has an ESG plan until they get punched in the ESG face.” Everyone in ESG now seems to be getting punched in the face with higher rates, inflation, and the end of QE.

We were on “Mornings with Maria Bartiromo” on Fox News on Monday 10/31 at around 655am and we discussed the disparity between AMZN and XOM. We also talked about the hypocrisy of Blackrock in the ESG space. All of this should not be too much of a surprise to our loyal followers who have been paying attention to our story for the past months.

For newer followers, please visit our websites www.esgorphans.com and www.constrainedcapitaletfs.com to see the media appearances, news stories, research, and general product information that supports the ESG Orphans story.

Please don’t hesitate to contact us through our site to discuss anything markets related and/or involving the ESG Orphans.

Also, please follow us on Twitter @MarkNeuman18 and @ESGOrphan.

Thanks for your continued support!

Mark Neuman
CFA, CIO/Founder of Constrained Capital, creator of the ESG Orphans