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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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.
Investors Pull Billions From Sustainable Funds Amid Political Heat. A new report showed that $13 billion was withdrawn last year from funds that invest in companies with environmental, social and governance principles.
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.
It's a play on the word whitewashing, implying that these mutual funds or ETFs are simply marketing themselves as "green" investments concerned with sustainability, but without actually delivering on that promise.
The researchers' findings indicate that when companies focus on nonmaterial ESG factors in their quarterly financial updates, investors interpret it as a negative sign, signaling potential issues like higher costs, inefficient resource use, and distracted management.
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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.
ESG Risks are those arising from Environmental, Social and Governance factors that a company must address and manage. These risks are a combination of threats and opportunities that can have a significant impact on an organisation's reputation and financial performance.
Unfortunately, ESG data suffers from a multitude of flaws, and in our view, does not focus on the areas that matter. One of the main challenges is that ESG scoring methodologies tend to focus on how well companies manage their internal processes, rather than the real-world impacts of their products and services.
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.
Critics say ESG investments allocate money based on political agendas, such as a drive against climate change, rather than on earning the best returns for savers.
Amidst this global trend, BlackRock, the world's largest asset manager, has taken a bold step by transitioning its investment strategy from ESG investing to a broader approach called transition investing. This move has significant implications not only for BlackRock but for the entire financial industry.
Manufacturing is one of the industries with the greatest impact on the environment, society, and governance. Significant ESG concerns threaten its long-term viability and competitiveness.
Examples of ESG scandals. Johnson and Johnson failed to disclose Neutrogena and Aveeno sunscreens contain the carcinogen benzene, a cancer-causing chemical (Downs et al., 2021). Johnson and Johnson announced a voluntary recall of selected Neutrogena and Aveeno aerosol spray sunscreens on July 14.
The results indicate that despite the extraordinary growth of ESG-driven strategies for both institutional and retail investors, there is no compelling evidence that crowding has impacted the efficiency of the asset-pricing mechanism of equity markets.
Time is running out for policymakers to act. Climate change affects investments primarily through: financially material climate risk factors (physical and transition risks), and investor flows out of carbon-intensive companies.
Sustainable investing has moved out of the niche and into the mainstream. In fact, it's so far into the mainstream that 77% of all global investors are now interested in sustainable investing, with more than half (57%) stating that their interest has grown over the past two years.
While the results from these time periods have been generally encouraging for ESG funds as a whole, we don't see convincing evidence that ESG funds are reliably better than non-ESG funds.
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