This chart shows 10-year Treasury yields (blue line) vs the inflation-adjusted annualized return of 10-year Treasuries bought that year and held to maturity (orange bars):
Data Sources: Robert Shiller, Aswath Damodaran
During the 1940’s, the war period of massive fiscal spending, the Fed capped rates below the prevailing inflation rate. Inflation was transient, coming in spikes, and yet rates were capped at 2.5% or below:
Data Sources: Robert Shiller, Aswath Damodaran
As a result, here’s what happened to anyone who bought and held 10-year Treasuries to maturity from the early 1940’s. Those Treasuries were paid back nominally, but a full third of their purchasing power was lost due to inflation of both the money supply and consumer prices.
Data Sources: Robert Shiller, Aswath Damodaran
CalPERS’ (California Public Employees' Retirement System) assumed plan returns going back 60 years compared to the U.S. 10-Year Treasury Note Yield. Back in 1960, the 10-Year was at 4%, and the planned return was 4%, so there's basically no risk premium. In 1981, the 10-Year was yielding about 14%, and the planned returns were 8%. So there was a -6% risk premium. You could have basically locked up a lot of your returns for some period of time. And then now the 10-Years is 70 basis points, roughly speaking, and the planned returns are 7%. Which doesn't seem crazy, but let's call it roughly almost a 6% point equity risk premium. So we've gone from -6% to 6% risk premium. Now you're the chief investment officer in one of these big pension funds, and you're like, "How am I going to get there?"
ESG (Environmental, Social and Governance), a measure of the environment and social impact of companies, has become one of the fastest growing movements in business and investing, and this time, the sales pitch is wider and deeper. Companies that improve their social goodness standing will not only become more profitable and valuable over time, we are told, but they will also advance society's best interests, thus resolving one of the fundamental conflicts of private enterprise, while also enriching investors.
Any attempts to measure environment and social goodness face two challenges.
• The first is that much of social impact is qualitative, and developing a numerical value for that impact is difficult to do.
• The second is even trickier, which is that there is little consensus on what social impacts to measure, and the weights to assign to them.
There are multiple services now that measure ESG at companies, but the lack of clarity and consensus results in the companies being ranked very differently by different services shows up in low correlations across the ESG services on ESG scores:
This low correlation often occurs even on high profile companies:
