Is ESG investing losing momentum? (2024)

FAQs

Is ESG investing losing momentum? ›

ESG investing appears to be losing momentum, as evidenced by several developments in October 2023.

These days, ESG investments have lost their luster given high interest rates, political backlash, and greenwashing scrutiny.

The ESG brand probably has its best days behind it. Direct. data suggest. among its top constituents, has lost 31% since the start of 2023 as renewable-energy projects have been shelved.

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.

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.

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.

89 percent of investors consider ESG issues in some form as part of their investment approach, according to a 2022 study by asset management firm Capital Group.

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.

Steep outflows from one passive iShares ESG fund accounted for a substantial portion of the outflows, according to Morningstar . Poor performance was the biggest drag. Sustainable equity funds generally lagged behind their conventional peers in 2023, though not by as large a margin as in 2022.

It's popular, having garnered $7 billion in total net assets. Over the past five years, including 2023 through December 4, ESGV has outperformed the broad U.S. stock market embodied by the diverse S&P 500 Index three of those five years. Source: Morningstar Direct, data through December 4, 2023.

Is it worth it to invest in ESG funds? ›

The success of ESG investing depends in some part on government policy. If legislators make a law which rewards ethical investing decisions, the funds can benefit greatly. A good example is policies which incentivise electric car purchases.

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.

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.

It argues that the SEC's mandatory disclosure rules are controversial and therefore ineligible for judicial deference because they impose a political viewpoint. The proposed rules are also controversial because they harm investors as a class in order to confer a benefit upon a subgroup of investors.

The backlash against ESG investing and climate-focused regulations has increasingly spread to Europe, once a leader in ESG regulations. Widespread protests by farmers throughout the EU have been spurred, in part, by sustainability-related protocols that have increased operating costs and reduced profit margins.

In all, BlackRock's ESG-related assets under management swelled 53% from the beginning of 2022 through the end of last year, according to data provided by Morningstar Direct. Over the same period, the wider ESG fund market grew only about 8%.

The results show that ESG controversies significantly reduces firms' overall investment efficiency, and such adverse impact is manifest in underinvestment inefficiency. Further analysis indicates that such a negative effect is more pronounced in firms with larger size and higher analyst coverage.

Data issues rank ahead of other challenges, such as greenwashing (cited by 61 percent of respondents) and reconciling ESG investing with fiduciary duties (53 percent). BNP Paribas says investors have different ideas on how to manage inconsistent ESG data, with some viewing it as an 'inevitable but manageable' problem.