Global investors pulled £8billion from woke ESG funds last year amid a backlash over greenwashing and the ‘vague’ promises they offer.
Figures from industry group Calastone show the three-year boom in the funds focused on environmental, social and governance issues was now over.
From 2020 to 2022, £40billion was ploughed into ESG in what proved to be a boon for active fund managers, Calastone said.
That was ‘astonishingly’ six times the investment committed to funds that did not have specific ESG commitments.
But last year billions were pulled out by investors, including £2.9billion in Europe where the reversal was seen first – and £940million in the UK. It has now spread, Calastone said.
U-turn: Blackrock boss Larry Fink was once at the forefront of the ESG movement but said last year that he had stopped using the term
The rise reflected demand to invest ethically by backing companies that cut carbon emissions or tackle discrimination in the workplace.
Typically, ESG investors might be expected to shun major oil firms or arms manufacturers.
But it has fallen victim to political divisions, particularly in the US. And the trend has also been subject to claims of ‘greenwashing’ – the idea that some firms flaunt environmental credentials, exaggerating their effect.
Larry Fink, boss of asset management giant Blackrock, was once at the forefront of the movement but said last year that he had stopped using the term. Calastone said the change last year had been ‘startling’.
The report added: ‘The great ESG backlash reflects accusations of greenwashing and an increasing concern that ESG is simply too vague to meet investor concerns.’
For example, a car maker that has improved governance standards might qualify to be part of an ESG fund even though a typical investor might not expect it to do so.
‘Whether it’s because people don’t really believe companies are walking the ESG walk, or are losing faith in the fund management industry’s ability to effectively differentiate between companies that meet the highest standards and those that do not, there has been a clear break in the trend,’ Calastone said.
‘2023 is the first year since at least 2019 that non-ESG equity funds have attracted more capital than ESG.’
Overall, investors pulled £5.6billion from equity funds last year and were ‘especially negative’ from May onwards, Calastone said.
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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.
The asset management sector is proactively marketing ESG funds. However, such ESG funds may misrepresent their ESG criteria, and regulators worldwide are clamping down on these incidents of greenwashing.
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.
Critics of ESG — such as a group of Republican states that banned Blackrock and other “ESG friendly” asset managers from their state pension plans — argue that considering environmental and social factors violates the fiduciary duty that asset managers have towards their clients.
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.
Because of company self-reporting, ESG is rife with greenwashing and false claims of social responsibility. ESG investing doesn't go far enough in addressing key environmental and social problems, including climate change.
Among the latest conservative culture wars is a crusade against environmental, social, and governance investing, a practice in which companies take into account non-financial factors like greenhouse gas emissions when making business decisions.
A clear example of this occurred in the mid-1980s when oil company Chevron released a series of costly commercials and print ads to market its environmental commitment, even though it was actually breaking federal regulations such as the Clean Air Act, Clean Water Act, and spilling oil into wildlife refuges.
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.
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 ...
Environmental, social and governance (ESG) is a framework used to assess an organization's business practices and performance on various sustainability and ethical issues.
The people who do not support ESG are the ones who want to make money.” In a nutshell, “opponents to ESG argue that consideration of factors undermines corporate competitiveness and will lead to lower returns for shareholders,” says Maloney.
“ESG investments are often opposed by conservatives who feel that ESG investments favor one political ideology and pressures companies to adopt 'woke' policies they don't support,” says Bruce.
Environmental, social, and governance (ESG) risks are the potential negative impacts that a company's operations or supply chain can have on the environment, society, and its own governance practices. ESG risks can have a significant impact on a company's financial performance, reputation, and ability to operate.
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.
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