Why are ESG funds underperforming?
“When ESG funds underperformed in 2022, we blamed it on their energy underweight,” said Ma. “But a second consecutive year of underperformance in 2023 can no longer be easily brushed aside.” In 2023, ESG funds were dragged down by too much exposure to clean tech and not enough to big tech.
A lot of their underperformance is thanks to missing on just a handful of tech stocks, according to a report from Morningstar. Last year, 82 out of Morningstar's 146 sustainability indexes underperformed their non-ESG equivalents, making 2023 the second worst performing year on record, after 2022.
“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.
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.
- Environmental. Conservation of the natural world. - Climate change and carbon emissions. - Air and water pollution. ...
- Social. Consideration of people & relationships. - Customer satisfaction. - Data protection and privacy. ...
- Governance. Standards for running a company. - Board composition. - Audit committee structure.
ESG investing's dark side threatens to undermine clean-tech strategies amid ravenous demand for metals: 'We should be under no illusion' Wind turbine manufacturers and EV makers are “massively exposed” to the systemic risks that stem from the link between mining and the clean-energy industry.
ESG Large-Blend Equity Funds Bounce Back From 2022′s Lows
In 2023, both sustainable large-blend equity funds and conventional peers lagged the Morningstar US Market Index, but the median shortfall was smaller for sustainable funds than for conventional peers.
Politicians have claimed that ESG criteria negatively impacts financial returns, but evidence behind that is mixed. While sustainable funds underperformed traditional funds in 2023, a separate study showed that ESG portfolios had as much as 6% excess returns annually compared to benchmark indexes between 2014 and 2020.
Jakarta, 22 December 2022 - Asset managers globally are expected to increase their ESG-related assets under management (AuM) to US$33.9tn by 2026, from US$18.4tn in 2021. With a projected compound annual growth rate (CAGR) of 12.9%, ESG assets are on pace to constitute 21.5% of total global AuM in less than 5 years.
ESG investing appears to be losing momentum, as evidenced by several developments in October 2023.
Do investors really care about ESG?
The research finds that retail investors do care a lot about the ESG-related activities of the firms, but mainly if they affect the value of their investments — not necessarily with altruistic motives.
The ESG Controversies Category Score is calculated based on 23 ESG controversy topics. During the year, if a scandal occurs, the company involved is penalised and this affects their overall ESG Combined Score and grading.
ESG funds have had about the same amount of risk as their peers. When it comes to the risk of an investment portfolio like a mutual fund, one common measure is the standard deviation of returns.
Musk himself became a vocal critic of ESG ever since Tesla was first booted from the S&P 500's sustainability index a year ago. After Fortune reported some two weeks later about allegations over fraudulent ESG investing by Deutsche Bank, Musk claimed all ESG lists were suddenly fraudulent.
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. They say ESG is just the latest example of the world trying to get “woke.”
Over the past decade or so, ESG edicts became embedded into corporate America's ecosystem as big shareholders —BlackRock, but also places like Vanguard and Fidelity — and the shareholder advisory firms like ISS and Glass Lewis increasingly voted in favor of these mandates that pushed companies to reduce their carbon ...
In December 2022, Florida announced that it was taking $2 billion out of the management of BlackRock, the world's largest asset manager (and biggest lightning rod for ESG criticism). This was the largest such divestment thus far. These attacks have been coordinated.
BlackRock's decision to shift from ESG investing to transition investing marks a significant evolution in the sustainable investing landscape. This strategic move underscores the importance of actively supporting transitioning companies to drive accelerated change.
To this, Musk responded: “(This is) Why ESG is the devil…” While ESG ratings are intended to assess a company's sustainability and ethical practices, Musk's behaviour and statements have often put him at odds with ESG frameworks, causing controversy and raising questions about the effectiveness of these ratings.
An anti-ESG ETF is an exchange-traded fund that excludes companies that meet certain environmental, social and governance (ESG) criteria. These criteria can vary from fund to fund but generally focus on companies that are not typically found in the typical sustainable ETF.
How are ESG investments performing?
Total ESG funds were down 29% in 2022, compared to a 21% drop in non-ESG fund assets, reflecting declines in global stock and bond markets as central banks raised interest rates to reduce inflation, the Ukraine war, and political backlash against the industry.
Environmental, Social, and Governance (ESG) is the umbrella term Schwab uses to describe various investing approaches that focus on social, environmental or corporate governance factors rather than solely risk and return.
Companies that meet ESG criteria are better positioned to meet consumer demand and maintain strong relationships with stakeholders. Investing in these companies not only supports your financial goals but also reinforces the importance of responsible business practices.
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.
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.
References
- https://www.joinleland.com/library/a/a-guide-to-private-equity-valuation-how-it-works
- https://www.ssctech.com/blog/a-closer-look-at-esg-investment-and-managerial-performance-results
- https://givingcompass.org/article/the-flaws-of-esg-investing-and-potential-solutions
- https://www.investopedia.com/articles/financial-careers/09/private-equity.asp
- https://news.bloomberglaw.com/in-house-counsel/esg-investing-laws-diverge-in-red-and-blue-states-explained
- https://fortune.com/2023/02/12/esg-investings-dark-side-threatens-to-undermine-clean-tech-strategies-amid-ravenous-demand-for-metals-we-should-be-under-no-illusion/
- https://www.blackrock.com/lu/intermediaries/themes/sustainable-investing/esg-integration
- https://www.greenbiz.com/article/esg-score-calculation-how-find-your-companys-rating-part-1
- https://study.uq.edu.au/admissions/financial-aid-international-students/us-federal-government-loans
- https://www.ballardspahr.com/insights/alerts-and-articles/2023/07/esg-initiatives-come-under-increasing-antitrust-scrutiny
- https://universityreviews.com.au/students/qld/queensland/
- https://climateimpact.edhec.edu/does-esg-investing-improve-risk-adjusted-performance
- https://news.bloomberglaw.com/esg/esg-campaigns-seen-falling-out-of-favor-with-activist-investors
- https://theconversation.com/who-decides-what-esg-is-and-how-to-make-investments-greener-new-research-208779
- https://www.velaw.com/insights/esg-is-over-as-we-know-it/
- https://www.esgdive.com/news/4-key-states-shaping-us-esg-regulatory-discourse-analysis-FL-TX-CA-NY/700047/
- https://www.linkedin.com/pulse/esg-investing-pros-cons-how-comply-osvaldo-berrios
- https://www.forbes.com/sites/christinero/2023/01/29/whats-behind-the-esg-investment-backlash/
- https://corpgov.law.harvard.edu/2023/09/13/esg-reporting-for-private-companies/
- http://www.uq.edu.au/study/docs/international/IntPG-why-choose.pdf
- https://fortune.com/recommends/investing/what-is-esg-investing/
- https://www.shiksha.com/studyabroad/australia/universities/the-university-of-queensland
- https://www.uq.edu.au/about/university-profile
- https://www.wsj.com/livecoverage/stock-market-today-dow-jones-01-29-2024/card/why-esg-funds-underperformed-in-2023-lack-of-exposure-to-meta-alphabet-Gf1fyNca9tbLmp1NczxT
- https://knowledge.wharton.upenn.edu/article/how-retail-investors-value-esg-and-frame-sustainable-investment-strategies/
- https://www.sustainalytics.com/esg-rating/tesla-inc/1035322998
- https://www.uopeople.edu/blog/revealed-oldest-universities-in-the-world/
- https://www.peakframeworks.com/post/private-equity-salary
- https://finance.yahoo.com/news/elon-musk-blasts-esg-devil-154219376.html
- https://www.forbes.com/sites/chriscarosa/2023/03/27/who-supports-esg-investing-and-whos-against-it-and-why/
- https://apnews.com/article/what-is-esg-investing-3a98b6f584357b8e10c31b1ff93ce4b6
- https://www.pwc.com/gx/en/services/sustainability/publications/private-equity-and-the-responsible-investment-survey.html
- https://hbr.org/2022/01/10-esg-questions-companies-need-to-answer
- https://www.marketplace.org/2024/01/19/why-are-investments-in-esg-funds-falling/
- https://www.sustainalytics.com/esg-research/resource/investors-esg-blog/the-state-of-esg-risk-across-industries--three-key-takeaways-from-our-annual-industry-reports
- https://www.barrons.com/articles/esg-fund-performance-2023-3d89618e
- https://www.idp.com/vietnam/study-in-australia/top-universities-in-australia/?lang=en
- https://www.forbes.com/sites/jamiehailstone/2023/10/17/most-americans-still-unclear-about-what-esg-means-survey-finds/
- https://www.ucem.ac.uk/whats-happening/articles/criticism-of-esg/
- https://www.wsj.com/finance/investing/step-aside-esg-blackrock-is-doing-transition-investing-now-59df3908
- https://www.thecorporategovernanceinstitute.com/insights/news-analysis/is-esg-investing-falling-away/
- https://www.sustainalytics.com/esg-rating/apple-inc/1007903183
- https://www.morganstanley.com/ideas/sustainable-investing-on-the-rise
- https://www.linkedin.com/pulse/impact-esg-company-valuation-abhishek-singh
- https://esg.wharton.upenn.edu/homepage/the-ethical-investor-confirmed-esg-investors-care-for-the-environment-as-long-as-it-turns-a-profit/
- https://www.pwc.com/id/en/media-centre/press-release/2022/english/esg-focused-institutional-investment-seen-soaring-84-to-usd-33-9-trillion-in-2026-making-up-21-5-percent-of-assets-under-management-pwc-report.html
- https://www.corporateservices.euronext.com/blog/governance/esg-reporting-mandatory-eu
- https://www.uq.edu.au/news/article/2023/11/uq-named-australia%E2%80%99s-best-university
- https://www.esginvestor.net/five-trends-shaping-the-future-of-esg-reporting/
- https://www.sciencedirect.com/science/article/pii/S0959652623033954
- https://iclg.com/practice-areas/environmental-social-and-governance-law/usa
- https://en.wikipedia.org/wiki/University_of_Queensland
- https://www.topuniversities.com/universities/university-queensland
- https://www.gotouniversity.com/university/university-of-queensland/sat
- https://www.idp.com/australia/study-and-live-in-brisbane/cost-of-living-in-brisbane/
- https://raoglobal.org/blog/blackrocks-shift-from-esg-investing-to-transition-a-bold-move-towards-sustainable-transformation
- https://www.esgbook.com/insights/esg-insights/esg-book-top-100/
- https://www.schwab.com/etfs/types/socially-responsible-etfs
- https://www.linkedin.com/pulse/005-esg-investing-vs-traditional-nguyen-hoang
- https://www.vrg.net/wp-content/uploads/2022/06/unlocking-esg-opportunies-explore-how-esg-impacts-en.pdf
- https://support.my.uq.edu.au/app/answers/detail/a_id/1362/~/where-can-i-find-uqs-grading-scale%3F
- https://www.cnn.com/2023/10/03/investing/premarket-stocks-trading/index.html
- https://staff.uq.edu.au/information-and-services/finance/accounting/tax/uq
- https://www.etf.com/sections/features/what-is-anti-esg-etf
- https://inrate.com/blog/what-is-esg-score-and-how-is-it-calculated/
- https://ballotpedia.org/Environmental,_social,_and_corporate_governance_(ESG)
- https://claytonmckervey.com/esg-reporting-considerations-for-private-companies/
- https://www.pwc.com/ke/en/blog/incorporating-esg-metrics-into-the-business-valuation.html
- https://www.wsj.com/articles/more-companies-are-disclosing-their-esg-data-but-confusion-on-how-persists-e667698c
- https://www.linkedin.com/pulse/esg-investing-losing-momentum-rishiftofficial-wwqwe
- https://www.shiksha.com/studyabroad/australia/universities/the-university-of-queensland/ranking
- https://www.forbes.com/sites/forbescoachescouncil/2023/09/19/navigating-esg-marketing-avoiding-unethical-pitfalls-for-sustainable-success/
- https://www.bankrate.com/investing/esg-investing-statistics/
- https://uqcollege.uq.edu.au/files/7349/UG%20Entry%20Requirements%20UQC-COL-Foundation%20Program%20Brochure%202023%20v25%20low%20res.pdf
- https://www.linkedin.com/pulse/esg-corporate-ethics-ethical-decision-making-integrity-sanjay-roye
- https://www.forbes.com/sites/betsyatkins/2023/12/07/businesses-must-focus-on-fundamental-performance-not-just-esg/
- https://www.morningstar.com/sustainable-investing/esg-fund-returns-recover-2023-most-sustainable-funds-trail-conventional-peers-by-small-margin
- https://www.bcg.com/industries/principal-investors-private-equity/esg-in-private-equity
- https://collegedunia.com/australia/university/596-the-university-of-queensland-brisbane/admission
- https://www.accenture.com/us-en/blogs/business-functions-blog/private-equity-esg
- https://www.linkedin.com/pulse/esg-risk-banking-financial-institutions-best
- https://www.carboncollective.co/sustainable-investing/how-to-invest-ethically
- https://www.visionofhumanity.org/balancing-profitability-sustainability-through-esg-investments/
- https://ochsner.uq.edu.au/about
- https://en.wikipedia.org/wiki/Environmental,_social,_and_corporate_governance
- https://www.cfainstitute.org/en/rpc-overview/esg-investing
- https://esg.conservice.com/how-esg-supports-lgbtq-community/
- https://www.forbes.com/sites/qai/2023/02/16/esg-stocks-what-is-esg-and-do-esg-stocks-outperform-the-rest/
- https://kpmg.com/us/en/home/insights/2022/06/2022-issue2-article1.html
- https://www.fool.com/terms/e/esg-rating/
- https://www.esgtoday.com/sec-adopts-rule-requiring-esg-labelled-funds-to-invest-80-in-alignment-with-theme/
- https://www.nasdaq.com/articles/what-financial-advisors-have-to-say-about-the-esg-controversy
- https://www.nb.com/en/dk/insights/insights-navigating-value-creation-in-private-equity
- https://businesslawreview.uchicago.edu/online-archive/trouble-tibble-environmental-social-and-governance-esg-and-fiduciary-duty
- https://hbr.org/2024/02/two-factors-that-determine-when-esg-creates-shareholder-value
- https://www.cnbc.com/2023/10/18/times-higher-education-top-20-universities-in-the-world.html
- https://www.schwab.com/learn/story/how-well-has-environmental-social-and-governance-investing-performed
- https://www.pwc.com/us/en/industries/financial-services/library/achieving-esg-goals.html
- https://hbr.org/2020/09/social-impact-efforts-that-create-real-value
- https://www.visualcapitalist.com/is-esg-investing-in-decline/
- https://www.linkedin.com/pulse/esg-investing-failure-making-sachin-kumar-sharma
- https://universitiesaustralia.edu.au/university/the-university-of-queensland/
- https://www.linkedin.com/pulse/5-reasons-why-esg-matters-sustainable-investing-ibtc-2
- https://www.bloomberg.com/news/articles/2023-11-08/investors-ignore-us-attacks-as-esg-judged-too-important-to-ax
- https://my.uq.edu.au/information-and-services/student-support/international-interstate-students
- https://nypost.com/2023/08/26/an-r-i-p-for-esg-is-near/
- https://www.efinancialcareers.com/news/2023/05/esg-pay-london
- https://study.uq.edu.au/stories/uq-named-1-university-australia
- https://www.mckinsey.com/capabilities/strategy-and-corporate-finance/our-insights/investors-want-to-hear-from-companies-about-the-value-of-sustainability
- https://www.lseg.com/content/dam/data-analytics/en_us/documents/fact-sheets/esg-scores-fact-sheet.pdf
- https://www.koody.co/blog/the-sustainable-investors-dilemma-ethical-or-esg-investing
- https://www.timeshighereducation.com/world-university-rankings/2024/world-ranking
- https://dspace.mit.edu/handle/1721.1/146657
- https://collegedunia.com/australia/university/596-the-university-of-queensland-brisbane
- https://www.wionews.com/opinions-blogs/the-unplugged-version-elon-musk-vs-esg-607211
- https://m.economictimes.com/markets/stocks/news/risk-vs-return-in-esg-investments-is-there-really-a-trade-off/articleshow/104260178.cms
- https://www.nasdaq.com/articles/esg-spending%3A-do-esg-stocks-outperform
- https://www.fundsglobalasia.com/march-2018/inside-view-the-limitations-of-esg