How picking climate stocks with momentum strategies can backfire

A tale of two index providers

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(Mark Hulbert, an author and longtime investment columnist, is the founder of the Hulbert Financial Digest; his Hulbert Ratings audits investment newsletter returns.)

CHAPEL HILL, N.C. (Callaway Climate Insights) — Imagine you’re in the business of constructing ESG indexes to sell to mutual funds and ETFs, and you’re deciding which of two stocks to add to a new index you’re creating.

How would you go about choosing? Because of what’s referred to on Wall Street as the “momentum effect,” your ESG index most likely will perform better over the next several months if you pick the stock that has the best trailing return. That in turn will make it more likely that mutual funds will use your index as their benchmark, earning revenue for your firm.

Would you actually succumb to this incentive? Quite possibly.