It was quite a month with the ESG Orphans ETF $ORFN advancing 5%. That compares to +5.4% for the $QQQ, +5.4% for the $SPY, and +2.2% for the $IWM. For the ESG-related ETFs, we saw ESGU (Blackrock’s ESG ETF) +5.5% and ESGV (Vanguard’s ESG ETF) +5.4%. The last day of November, on the back of Powell’s kind words, saw the market have its biggest month-end day in nearly a decade.

In November, we saw the Utilities as a leading contributor to the ESG Orphans as the Dow Jones Utility Index gained over 7%, led by $NEE (5.77% ESG Orphans weight) gaining 9.3%.

The Weapons’ sector (21% of the ESG Orphans) helped as well with a 2.4% gain in the Aerospace and Defense Index led by a 4.1% move higher in RTX (6% of ESG Orphans)

Energy was flat on the month, a little bit of laggard after carrying the torch for this Index for so long.

ESG Factor Isolation, Diversified anti-ESG Basket

I want to take a minute to discuss the diversity within the isolated ESG factor and the attributes provided by the “other 25%” weight in the ESG Orphans. This is the alcohol and tobacco sector. These goods are inelastic and can survive various economic cycles. We like to say, “Good times, bad times, inflation times,” these goods remain popular.

PM is Philip Morris and carries a 6.2% weight in the Index. It was up 8.5% in November. It also carries a 5% dividend yield. PM helped the strong performance of the ESG Orphans in November. I would also add that DEO carries a 4.1% weighting in the ESG Orphans and gained 11.7%. Anheuser Busch InBev, known as BUD, carries a 4% weight in the ESG Orphans and gained 17.5% in November.

This is how the high expected returns basket of stocks in this “anti-ESG” posture should work. It’s a diversified, factor isolation of ESG. As the news keeps coming fast and furious against ESG, more investors will shun ESG investing. We have seen this as Blackrock shut down a recent ESG offering in Europe.

ESG Investing Continues to Distort the Landscape, Makes it Hard for Investors

Investors are realizing that they have been misled. They have paid higher fees and got bad returns while objectives failed as risks piled up. Food and energy insecurity is ubiquitous. Everyone owns the same stocks, especially large cap tech under the guise of “ESG.”

Consider the World Cup in Qatar where it’s illegal to be LGBTQ. Players have been banned from wearing rainbow armbands in support of LGBTQ. Meanwhile the sponsors have their logos and names posted everywhere. This includes Coca Cola (top holding at Nuveen’s ESG Fund,) Visa (in a lot of ESG funds,) and Adidas. Are they supporting LGBTQ or just want to be posting ads in the Qatar World Cup? Germany took a pro-LGBTQ stance on the armbands and then days later signed a 15-year LNG deal with Qatar.

What about AAPL? They are limiting Chinese communications on the IPhone to make nice to the Chinese Communist Party and help their authoritarian grip on the population. AAPL is the top holding in most ESG funds.

The bloom is off the ESG rose now. This will continue. When investors see year-end statements at the end of this month, they will realize a lot of what we have been talking about. ESG has higher costs and lowers returns. In addition, it has failed objectives and created massive amounts of risks in investor portfolios. How can ESG investors own AMZN (in 75% of ESG funds) as the top non-energy global carbon footprint? 95% of Wall Street had AMZN as a “buy” this year and it’s down 40%. Yikes! We think this worsens into 2023. Tech may be a worthy investment for some in their portfolios, but it’s not an “ESG” investment because the companies pass some made up due diligence questionnaires just to “check the box created by Larry Fink.”

Looking Forward

Zooming out, we see the ESG Orphans Index +22% YTD outpacing most everything. This is especially so versus ESG funds where the Orphans are ahead on an absolute basis by as much as 35-50%, depending on where you look. Our plan is working.

Part of the challenge to ESG investing is that QE and ZIRP have ended. Rates are no longer easy; money costs something. Every extra hire, the next “Chief People Officer,” or “Chief Sustainability Officer,” weighs more heavily on PnL. Costless boondoggles are gone. GOOGL said in their EPS’ report, “We need to cut costs, hire less.” This means they overhired in too many areas that impacted PnL negatively.

When money is easy and costless, spending on new ideas to sound good and to appease the due diligence questionnaires is daily practice. As costs rise and dollars and cents matter, foolhardy hires are exposed. We are seeing that now. Tech companies are laying off 100s of thousands of employees. Tech was the biggest beneficiary of the ESG movement by orders of magnitude. The Technology Sector as a weight in the SPX climbed from 18% in 2009 to 36% in 2021. The unwind of this excess has begun. It’s still far and away the most overcrowded sector of the market. Higher rates and negative ESG outcomes are the cause.

As we look out onto the landscape of 2023, one thing we can say with certainty is that ESG has distorted the investing landscape. It’s as hard as ever for investors to do well. An RIA’s job is extremely difficult now.

We saw this ESG unwind from a long distance away. We designed the ESG Orphans Index and the tracking stock $ORFN to capitalize on the ESG unwind which has just begun. Our basket is not a virtue signal. It has nothing to do with peer pressure investing. We focused on the excluded sectors under ESG capital constraints. Nobody owns these names. They are high expected return securities. Hedge fund luminary Cliff Asness discussed this concept a while back. A legend in academia, NYU’s “Dean of Valuation,” Professor Aswath Damodaran and I have discussed at length the higher costs and lower returns of ESG investing. The smart investors know.

As you look out onto 2023, consider where $ORFN might have a place in your portfolio. It provides a value bent, a mid-cap exposure, and stable, real goods-producing component to your investment strategy. It’s part of a portfolio barbell strategy.

We are always happy to speak about the ESG Orphans and the attributes it provides to a portfolio. Remember, this is a long horizon trade spanning 3-5-7 years as the full effect of the ESG unwind plays out.

Media Appearances

We just completed a 3-part video series on YouTube working with ETF Guide. The first two episodes feature NYU’s Professor Damodaran discussing “The Emptiness of ESG,” and renowned energy expert Dr. Anas Alhajji discussing, “The Energy Crisis Created by ESG.” in the final episode, Mark Neuman discusses ESG Orphans, comparing the strategy versus the broader market along with competitors and overall investor suitability.

Truth is ESG

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