There is a lot of hype in our industry about ESG investing, which is the new way to talk about socially responsible investing (SRI). The new name, ESG, stands for Environmental, Social, and Governance.

The last time I wrote about socially responsible investing was in 2014, and you can read the article here. I wrote that we don’t use ESG funds (which I called SRI back then) unless clients direct us. So far, the uptake is minimal, but a few people and organizations want to express their values through these funds.

A Barron’s article over the weekend argued that ESG funds had recently failed a big test, and I thought the article was unfair. Basically, it said that ESG funds have underperformed the market so far this year.

They pointed out that ESG funds are light on energy stocks because of their environmental impact and heavy on technology stocks which have a lighter environmental impact and often focus on social issues.

In the first quarter, energy stocks soared with energy prices, and technology stocks underperformed because interest rates are rising (I think other issues are at play, but that’s the main narrative, so I’ll stick with that).

In my mind, that doesn’t mean that ESG funds ‘failed a key test,’ as Barron’s writes. What was the test? That the funds underperformed? Shouldn’t we expect that from any strategy that deviates from the market? Of course, if you are different from the market, there will be times when you are better and times when you aren’t as good.

And, I’ll bet that the people that bought ESG funds because they don’t want to profit from the impact that energy companies have on the environment don’t care that they missed these profits. I’d bet that they are happy with the results, despite the recent and short-term underperformance.

I think the Barron’s article missed the mark, but I’m not exactly an ESG investor. I’m fine with the concept, but I’m not sure that the funds do exactly what people think they do.

I don’t know if the story is true, but I heard it at a conference and thought it was funny. The speaker was talking about the difficulty of creating ESG rules. He noticed that a bank had a much worse rating than a mining company and thought that sounded funny since a miner impacts the environment pretty directly and a bank doesn’t.

Upon further inspection, he said that the mining company had comprehensive policies for when workers suffered terrible injuries on the job, which I assume is not infrequent in a mine in a developing country.

The bank didn’t have any policy to that effect, presumably because it’s not that dangerous. But, the ESG score didn’t understand that difference and gave the miner points for having the policy and penalized the bank for not having the policy.

This story is from 10-years ago, and maybe the scoring system is different now.

In my 2014 article, I referenced the Vice Fund (ticker symbol: VICEX) that invests in vice: casinos, defense contractors, cigarette companies, firearms companies, brewers, etc. I thought it was funny that a fund would pursue these strategies, but I would never invest in it.

And good thing, too, the fund hasn’t done very well, although I don’t know why.

But here’s the thing: the Vice Fund ranks pretty well on MSCI’s ESG scoring tool, with an A rating. There are two better ratings, AA and AAA, and four worse, down to CCC.

It’s right in the 51st percentile globally and is considered average. The ratings appear to capture the controversial weapons and tobacco exposure, and the carbon intensity usage of the portfolio companies is average.

It seems funny to me that a company that invests in vice, seeming to thumb its nose at ESG, should end up right in the middle. Who is at the bottom of the rating scale? I don’t know, but it reinforces my feeling that these funds don’t do what you might think they would.

If you are buying ESG funds because you think they will outperform the market (or never underperform as Barron’s seems to think), then I don’t think they are a great idea.

If you look up the ratings, see how they work, and feel comfortable that they are headed in the right direction but not perfect, I think that’s fine. Not compelling, but fine if they fit your values closely enough.