Environmental, social and governance investing was never going to be a panacea for climate change ills, and the growing reaction against it now highlights the risks of poorly thought out measures. It also means that time may have been wasted in the quest for financial solutions in the climate fight.
A net US$40 billion has been withdrawn from ESG equity funds thus far in 2024, the Financial Times reported on June 6, citing research from Barclays. According to the report, this is the first year that the flows have tended negative since ESG investing was launched 20 years ago, with investors “turning their backs on sustainably focused stock funds as poor performance, scandals and attacks by right-wing US politicians hit a sector that has pulled in trillions of dollars of assets”.
But the ESG concept has been flawed in other respects since its inception in 2004, when then UN Secretary General Kofi Anan urged chief executives of leading financial institutions to join a global compact to integrate ESG factors into capital market and investment practices.
One drawback is that ESG investing requires investors to focus their attention across a spectrum of issues ranging from corporate governance to somewhat nebulously defined “social” questions, and even more diverse environmental issues.
Another major problem is that compliance has spawned a whole new monitoring industry – especially on emissions – which has led to some confusion and conflict on the standards, as well as higher costs.
Greenwashing and “woke”
ESG has also run into trouble as a form of investment which fosters rather than deters “greenwashing” by enabling companies to pay lip service to environmental sustainability while continuing to carry on polluting activities that fly under the radar of compliance.
It has been heavily criticised by some US political lobbies as a form of “woke” activity that is anti-business and which impairs US competitiveness internationally.
In fact, Larry Fink, chief executive officer of US asset management giant BlackRock, was quoted a year ago as saying: “I’m not going to use the word ESG because it’s been misused by the far left and the far right.”
A recent commentary on the website of Indeed, an international recruitment agency noted: “Negative rhetoric surrounding ESG [grew into] a rapidly escalating backlash in 2024 and some two-thirds of US states have legislated against it in some form.”
For all its actual or alleged shortcomings, ESG has nevertheless attracted an enormous amount of investment already, chiefly in the form of equity but also in fixed income, and mainly via exchange-traded funds.
According to a Bloomberg Intelligence report in January, global ESG assets surpassed $30 trillion in 2022 and are on track to top $40 trillion by 2030, or over 25% of the $140 trillion of assets under management projected by that year. But the recent trends have raised questions about this growth.
Estimates of the amount of assets managed in the form of ESG can vary widely depending upon the definition of what constitutes investments that should fall under the categories of “environmental and “sustainable” especially, and sometimes of “governance” too.
The issue that is likely to be raised by the seemingly growing disenchantment with ESG is whether money would be better directed into other forms of sustainable investments, such as impact investing.
More fundamentally, there is the prospect of securitising ESG investments made by multilateral development banks like the World Bank, which are becoming increasingly involved in climate change prevention and sustainability issues.
