ESG Challenges Although the popularity of ESG funds is rising, there are still some challenges that investors should not ignore. For many years, ethical or “responsible” investment has been a niche industry—in this industry, investors often have to accept lower returns as the price of faith. This is because such funds usually exclude stocks that are considered to be harmful to the environment or society, such as oil stocks or stocks of weapons manufacturers, so that fund managers can only buy stocks with a more limited scope. In addition, the costs of managing ESG funds are usually higher than those of other active funds. On the other hand, ESG-related disclosure data is still scattered and sparse. According to the British "Financial Times" report, Jason Mitchell, the fund manager of Inshman, admitted in the process of looking for ESG factors that only about 5 to 7 years of relevant data may be analyzed. For quantitative researchers who usually study data for decades or even hundreds of years, to use these related data as the basis of the algorithm, the amount of data is very small. In addition, the data that seems to indicate that ESG stocks are performing well may actually be driven by other topics, such as US stocks performing better than European stocks, or market capitalization-mid-cap stocks are performing better than large stocks. Mitchell said: "When you start research, most ESG factors have two-thirds or greater proportions of other things. The data is problematic." Some people use unconventional methods to solve this problem. Didier Cossin, a professor at the Swiss IMD Business School, has designed a program that can scan thousands of companies ’annual filings to find word structures that indicate good governance. Coson said that the program outperformed the S & P 500 during the bull market in 2017, the sell-off in 2018 and the rebound in 2019. Insman's Mitchell believes that the company discovered ESG factors unrelated to the market earlier this year. Some funds operated by Numeric, the company ’s Boston division, recently implemented the factor, using a series of inputs: the company ’s policies on the efficient use of resources, the company ’s fines, employee diversity, and shareholder rights and whistleblower protection. But others remain vigilant. UBS's Purcell cited an example of an electric vehicle manufacturer. Electric cars are more environmentally friendly, but this company uses cobalt that is unethically mined in the Democratic Republic of Congo, so is this stock an ESG stock? He said: "It is difficult to find that factor."
