Some years ago, the University of California pension fund managers decided to embrace ESG investing. Nobody asked us beneficiaries. If they had, we might have pointed out that the fund managers are both misleading and shortchanging those of us who have entrusted them with our money.
Consider the example of the UC Domestic Equity Index Fund. This fund claims to be a Large Cap blend fund. But it also claims to track the performance of the Russell 3000 ex Tobacco ex Fossil Fuels Index.
Problem # 1: The Russell 3000 is not really a large cap fund. If you wanted to track a large cap index, you'd probably want to track the S&P 500, which is widely regarded as the best means of tracking of Large Cap U.S. equities. But you would not select the Russell 3000, which contains about 98% of the US equity market. The Russell 3000 is large cap, mid cap, and small cap all in one.
Problem # 2: The Russell 3000 ex Tobacco ex Fossil Fuels Index has underperformed the Russell 3000 index on a YTD, 1 year, 5 year, and 10 year basis. It's done particularly badly in 2022, losing 11.65% compared to 10.80% for the non-ESG index.