April saw decent return for the Orphans as they outperformed on a monthly basis for the first time in 2023. We expect more to come as our thesis continues to play out. Have a read…

April Month-End

The ESG Orphans ETF $ORFN gained 1.7% in the month of April. That compares to a return in SPY 1.7%, QQQ 1.19%, and IWM -2.1%. It was a decent month for the Orphans after a tougher Q1. It was the first monthly outperformance over these other ETFs of 2023. We expect more of this going forward.

Recall that Q1 was a “Reversion of the reversion of 2022,” where the worst performers of 2022 were the best performers of Q1 2023. In that period, Orphans lagged while big tech and the QQQs led. Conversely, 2022 was a disaster for QQQ and big tech while the Orphans significantly outperformed.

Breaking down some of the April attribution into components of ORFN, we see that the weapons’ component was a laggard. Names like LMT -1.2% (5.4% wgt) and BA -2.8% (5.2% wgt) caused that sector to struggle. Meanwhile fossil fuel saw a better month with XOM +4.4% (8.1% wgt) and COP +3.5% (2.3% wgt) leading the way. The nuclear energy sector was mixed with NEE -90bps (5.4% wgt) while SO +5.7% (2.9% wgt.)

Alcohol and tobacco saw mixed gains with MO +6% (3.8% wgt) leading and BUD -2.5% (4.7% wgt) lagging.

News and Flow

The stories are dropping daily about the ESG controversy. As a reminder, Constrained Capital focuses on capital constraints in areas of the market. ESG has been the biggest capital constraint on markets for the past decade. This misallocation of capital and general malinvestment has excluded our Orphans.

We are not anti-ESG in our daily life. We are anti-ESG from the misleading investment thesis perspective. Investors were duped. They need to hear the truth to make smart investment decisions and manage ESG risk. Our mission is to explain both sides and cite risk imbalances in the current ESG narrative. To that end, we created a vehicle to assuage ESG risk and capitalize on investment opportunity within ESG.

Recently we reviewed a white paper sent to us by a friend of Constrained Capital, NYU’s Professor Aswath Damodaran. We investigated this document, “Four Facts About ESG Beliefs and Investor Portfolios,” created by academics at Yale, UPenn, Stanford, Georgetown, and NYU. It discussed fascinating findings linking ESG investing to climate change concerns. It showed investors willingly accepting lower returns with ESG investments. (At Constrained we wonder if ESG sales’ pitches tell investors up front, “ESG investing lowers returns?”)

We reviewed the white paper, summarized it, and connected a few dots for investors to consider going forward. The feedback has been great. The LinkedIn posting is here: https://lnkd.in/gbM97YPS

In addition, we recently saw the co-founder of Greenpeace, Dr. Patrick Moore, admit something stunning: “The scientific method has not been applied in such a way as to prove that carbon dioxide is causing the Earth to warm…. I am firmly of the belief that the future will show that this whole hysteria over climate change was a complete fabrication.” This is damning for the climate change narrative.

We have debunked the ESG investment thesis from the perspective of ex-ante/ex-post impact and immeasurability. Our research is detailed on our websites in articles we have written and others we reviewed. Add in the recently reviewed white paper connecting heavy ESG investing with climate change nervousness and scare. It is not a stretch to link the ESG/climate change narrative interconnectedness and it being derived from opinion, theory, and emotional appeal. Therein lies an elevated risk. We have already seen the “hidden” risk emerge in ESG ratings on Russia, FTX, and SVB. We believe there is more
risk on the horizon.

Coup d ’Grace of the Absurdity of ESG Labeling

MSCI is one of the rating agencies that feeds at the ESG trough. Our past research found a Bloomberg article from December 2021 citing MSCI as caring far more about creating indices and finding users of their data than about actual ESG. See the Bloomberg article, “The ESG Mirage” here: https://www.bloomberg.com/graphics/2021-what-is-esg-investing-msci-ratings-focus-on-corporatebottom-line/

Now for the punchline: We created the ESG Orphans by isolating the stocks/sectors with ESG imposed capital constraints. Those constraints excluded the Orphans. We saw zero consistency in any part of the ESG process other than what they left out, excluded from their portfolios. Fossil fuel, nuclear energy,
weapons, alcohol, tobacco, and gambling were constrained by ESG and abandoned as “Orphans.” We gathered these exclusions, the rejects of the ESG investment bubble.

Do you know what ESG rating MSCI gave the ESG Orphans? An “A!” MSCI gave the Orphans a quality rating of 6.7 out of ten. All the exclusions of ESG investing of the past decade (quantitatively confirmed) collected into a basket score an “A” and rank in the top 1/3rd of ESG, according to MSCI, one of the ESG
rating agency leaders. It would be funny if it weren’t so sad.

This seems to be something from the Onion or the Babylon Bee, but it is not. This underscores a major fundamental in ESG. Investors are being misled. They are paying higher fees for failed objectives. The biggest negative is the huge risk being created both seen (food/energy insecurity aka inflation) and unseen (Russia, SVB, FTX) that take a while to boil to the surface, causing financial and societal destruction in their wake.

We have done the ESG deep dive. We spoke with government officials. We’ve consulted with academics and investing legends. We are ESG experts. Recently we spoke at a conference, and someone said after, “Very bold, courageous, and honest. You’ve got guts!” We appreciated the comment but felt disappointed that we are in a world now where telling the truth and being factually accurate and honest is seen as a badge of courage. This speaks volumes.

We are always available to share in the Truth in ESG to help investors navigate the investing landscape that has been distorted due to financial chicanery via monetary policy and social/political pressures delivered by an oversaturated media market.

Thanks for your support of the ESG Orphans.

Mark Neuman is the CIO/Founder of Constrained Capital and creator of the ESG Orphans Index and the ETF that tracks it, $ORFN.

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Past performance is not indicative of future performance. Index returns above are for illustrative purposes only. They do not represent actual trading in investable assets and securities. They also don’t account for fees or expenses in trading. You cannot invest directly in an index.

This document is not a recommendation or suggestion of any investment ideas. It is not an offer to buy or sell any securities. It’s for discussion purposes only. Please consult your financial advisor and perform due diligence before making investment decisions.

The SPX Index or S&P 500, is a stock market index tracking the stock performance of 500 of the largest companies listed on stock exchanges in the United States.

The NDX Index is a stock market index made up of 101 equity securities issued by 100 of the largest non-financial companies listed on the Nasdaq stock exchange.

The Invesco QQQ ETF is an exchange-traded fund (ETF) that tracks the Nasdaq 100 Index.

The Utilities Select Sector Index is a modified capitalization-weighted index representing the performance of utility companies that are components of the S&P 500 Index.

The Energy Select Sector Index is a modified capitalization-weighted index representing the performance of energy companies that are components of the S&P 500 Index.

ARK Innovation ETF, also known as ARKK is an actively managed Exchange Traded Fund (ETF) that seeks long-term growth of capital by investing under normal circumstances, primarily in securities of companies that are relevant to the theme of disruptive innovation.

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