Is ESG losing money?
Total assets under management in ESG funds fell by about $163.2 billion globally during the first quarter of 2023 from the year before, according to data provider Lipper.
As ESG flow momentum declines globally, regions like Europe and Australia have still been able to maintain positive numbers. In Australia, over $760 million flowed into ESG ETFs in 2023. However, other nations, including the US, have been shunning ESG ETFs, leading to billions of dollars in net outflows in 2023.
Activist investors are expected to carry out fewer environmental and social campaigns this year after the strategy proved less lucrative than other shareholder agendas, according to business consulting firm Alvarez & Marsal Inc.
These days, ESG investments have lost their luster given high interest rates, political backlash, and greenwashing scrutiny.
Missing out on returns from the so-called "Magnificent Seven" tech stocks was one of the biggest reasons for underperformance. Meta, Alphabet, Tesla and Amazon were all excluded from certain ESG indexes due to ESG controversies or because they had a high ESG risk relative to others in their sector.
An ESG controversy case is defined as either an event or an ongoing situation in which company operations and/or products allegedly have a negative environmental, social and/or governance impact.
The global ESG and sustainability reporting focus is shifting from being largely voluntary to a mandatory disclosure landscape. Underpinning this shift is a patchwork of global regulations with various environmental, social and governance (ESG) disclosure requirements.
Firms with ESG controversies will likely suffer from higher financing costs and inadequate investment capability, leading to investment inefficiency.
ESG investing focuses on companies that follow positive environmental, social, and governance principles. Investors are increasingly eager to align their portfolios with ESG-related companies and fund providers, making it an area of growth with positive effects on society and the environment. S&P Global.
Retail investors do care a lot about the ESG-related activities of the firms they invest in, but only to the extent that they impact firm performance, independent of ESG performance.
Is ESG over?
Global fossil-fuel production rose despite pledges from world leaders to reduce emissions. Even vocal ESG evangelist Larry Fink of BlackRock declared that he would no longer use the term ESG due to its politicization. In the run-up to the pandemic and through 2022, ESG as an acronym became widely used.
Long-Term Sustainability - Companies that focus on ESG factors are often better positioned for long-term sustainability. Sustainable business practices can lead to resource efficiency, cost savings, and resilience in changing market conditions.
ESG stands for Environmental, Social and Governance. This is often called sustainability. In a business context, sustainability is about the company's business model, i.e. how its products and services contribute to sustainable development.
Ironically, viewing sustainability through an Environmental, social, and governance (ESG) risk and financial materiality lens still systematically underestimates future financial risks and fails to identify emerging opportunities. Data and information being used to make decisions is not decision useful.
ESG Large-Blend Equity Funds Bounce Back From 2022′s Lows
In 2023, both sustainable large-blend equity funds and conventional peers lagged the Morningstar US Market Index, but the median shortfall was smaller for sustainable funds than for conventional peers.
That means investors could be exposed to certain risks they aren't expecting. More specifically, my research found that the average ESG investor may be taking on more small-cap risk, interest-rate and inflation risk, and single-stock risk than an investor in a standard all-equity fund.
Some opponents also believe that ESG investing is politically motivated and could lead to biased investment decisions.” In a line used by proponents, those in opposition to the ESG movement also believe there is substantial support behind them.
Republican politicians have criticized ESG because they say they consider it an effort to use financial tools for the purpose of advancing liberal political goals.
In December 2022, Florida announced that it was taking $2 billion out of the management of BlackRock, the world's largest asset manager (and biggest lightning rod for ESG criticism). This was the largest such divestment thus far. These attacks have been coordinated.
There is currently no federal mandate for ESG (Environmental, Social, and Governance) reporting in the United States. However, there are various initiatives and regulations that require companies to disclose certain ESG information.
Who decides what is ESG?
ESG scores are set by the companies themselves. ESG scores measure the degree to which environmental, social, and governance risks and opportunities are integrated into an organization's strategy and business operations.
For governments, the goal is to build long-term sustainability and achieve desired outcomes for constituents and other stakeholders. ESG includes a wide range of categories to assess the impact of a government agency's services and practices on the planet and society.
Despite the recent challenges, ESG investing is likely to remain a trend in the years to come. As investors become more aware of the environmental and social impacts of their investments, they are increasingly seeking out investment products that align with their values.
In its basic form, greenwashing uses manipulation and misinformation to garner consumer confidence around a company's environmental, social or governance (ESG) claims.
New McKinsey research finds that companies that courageously pursue stronger growth and profitability while improving ESG performance deliver superior shareholder returns.
