Until recently, investors werepouringmoney into ESG and sustainability funds, according to Alyssa Stankiewicz of Morningstar. Michael M. Santiago/Getty Images
Republicans in New Hampshire have floated two bills that would make it a felony to invest taxpayer dollars in ESG funds. These are investment funds that incorporate environmental, social and governance factors into their portfolio.
In addition, the investment research firm Morningstar just came out with an analysis that showed, for the first time on record, investors pulled more money out of ESG and sustainability funds than they put into them.
Until recently, investors werepouringmoney into ESG and sustainability funds — roughly $20 billion in 2019, $50 billion in 2020 and $70 billion in 2021, said Alyssa Stankiewicz, who researches ESG funds at Morningstar.
And during that period, ESG actually generated better returns than traditional investments. Then in 2022, Russia invaded Ukraine and the price of oil went nuts.
“When Exxon and Chevron took off in 2022, sustainable funds didn’t perform as well as their conventional funds because they didn’t benefit from that rally,” Stankiewicz said.
She said the Federal Reserve’s fight against inflation didn’t help.
“When someone’s looking at an environment of high interest rates, it can make activities like building out renewable energy less profitable,” she said.
So part of the ESG retreat is just investors chasing higher returns elsewhere. The other part is politics.
“About 40% of U.S. companies have experienced some form of backlash, which can range from healthy skepticism all the way to being the targets of political opportunism,” said Paul Washington, executive director of the ESG Center at The Conference Board.
Conservatives have charged big financial firms like BlackRock with prioritizing a so-called woke agenda over their fiduciary duties. So instead of greenwashing, a new term has entered the chat:greenhushing.
“The fact we no longer use the term ESG on analyst earnings calls, that fund prospectuses are dropping the term ESG, doesn’t mean they’re changing what they’re doing,” saidWitoldHenisz,vice dean of the ESG Initiative at the Wharton School. “But they’re self-censoring because they don’t want to be called out in a congressional hearing.”
He said the right way to judge ESG investing is how it performs in the long term — even if it’s not called ESG by then.
Correction (Jan. 22, 2024): A previous version of this story misspelled the first name of Witold Henisz and misstated his title at the Wharton School.
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FAQs
“When someone's looking at an environment of high interest rates, it can make activities like building out renewable energy less profitable,” she said. So part of the ESG retreat is just investors chasing higher returns elsewhere. The other part is politics.
Why are investors pulling out of ESG funds? ›
Rather, this could simply reflect a changing climate and a desire by companies to avoid any controversy associated with ESG investing. The money flowing out of E.S.G. funds has gone from a trickle to a torrent as investors sour on a sector hit by greenwashing concerns, red-state boycotts and boardroom debates.
Why is ESG investing declining? ›
Evidence of Decline
The enthusiasm for launching new ESG funds has also waned. While previous years saw a proliferation of new ESG products, recent data indicates a slowdown. Regulatory uncertainty and political rhetoric have led to a more conservative approach among fund managers.
Why not to invest in ESG funds? ›
Two main critiques are offered: first, ESG investing violates the obligations of fiduciaries to solely focus on financial benefits for their customers and retirement plan participants, instead favoring social and environmental policy goals of no financial significance.
What is the problem with ESG funds? ›
When ESG data providers cannot find the data they need, they use estimates, which sometimes result in strange outcomes. Finally, there are inherent biases in the scores, with larger, developed market companies tending to score better than smaller companies, especially in emerging markets.
Why are people against ESG? ›
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.
Why are ESG funds falling? ›
“When someone's looking at an environment of high interest rates, it can make activities like building out renewable energy less profitable,” she said. So part of the ESG retreat is just investors chasing higher returns elsewhere. The other part is politics.
What's behind the ESG investment backlash? ›
Backlash in the U.S. and EU
Several Republican-governed states blacklisted money managers with public sustainability commitments and introduced legislation aimed at limiting the ability of financial institutions to include ESG considerations in investment strategies.
What are the disadvantages of ESG investing? ›
However, there are also some cons to ESG investing. First, ESG funds may carry higher-than-average expense ratios. This is because ESG investing requires more research and due diligence, which can be costly. Second, ESG investing can be subjective.
How risky is ESG investing? ›
If companies fail to remain mindful of their ESG risks, it could result in a lack of interest from future investors, losing loyal customers who have grown more aware of societal and environmental issues, and potentially ignoring the requirement to comply with current environmental regulations – which can result in ...
We document the government push for ESG in the United States, Europe, and other Organisation for Economic Co-operation and Development (OECD) nations, and by international financial institutions. We do not deny that many investors across the globe are interested in ESG as opposed to only private returns.
What are the complaints of ESG? ›
Many issues come under the ESG umbrella, including complaints concerning the organisation's environmental impact, allegations of misreporting or conveying a false impression of environmental and sustainability credentials (greenwashing), tax evasion and corruption, human rights abuses in the supply chain and bullying, ...
Do investors really care about ESG? ›
Investors increasingly believe companies that perform well on ESG are less risky, better positioned for the long term and better prepared for uncertainty.
Why did ESG fail? ›
The problem with ESG investing, said Jenkins, is that you “can't have materiality embedded within a metric in a qualitative fashion.” In other words, if you're talking about something based on feelings or opinions (qualities), it's really difficult to measure them without specific details (quantities or concrete things ...
Who pays for ESG? ›
IS IT JUST MILLENNIALS DOING IT? No, the vast majority of money in ESG investments comes from huge investors like pension funds, insurance companies, endowments at universities and foundations and other big institutional investors.
Will ESG funds recover? ›
ESG Fund Returns Recover, but Still Trail Conventional Peers by a Small Margin. The tech stocks that helped ESG funds and the utilities that hurt them in 2023. Sustainable funds performed much better in 2023 compared with 2022, but results were mixed across asset classes.
What are the outflows of ESG funds? ›
Outflows persisted in both active (-8.3bn) and passive (-$5.1bn) ESG funds. Equity ESG funds suffered the greatest outflows (-14.5bn) followed by allocation funds (-$220m) and commodities (-$97m). Fixed income is the only category that has had continued inflows since the market selloff in 2022.
How do investors benefit from ESG? ›
This type of ethical investing strategy helps people align investment choices with personal values. ESG stands for environment, social and governance. ESG investors aim to buy the shares of companies that have demonstrated a willingness to improve their performance in these three areas.
