Investing in ESG – an acronym that serves to evaluate companies using environmental (Environmental), social (Social) and governance (Governance) factors – was one of the most cited phrases in earnings presentations during the first half of the year.
But a looming recession, plummeting stock markets and the run-up to midterm elections in the United States have put those efforts into sustainability on the bloc of cuts.
What’s up: The rapid rise in investment in ESG funds has come to a complete halt in the era of the pandemic, according to Refinitiv analysis provided exclusively to CNN . In September, ESG funds saw their biggest cash outflow from investors since the March 2020 recession.
These ESG and responsible investing funds have seen assets under management peak above $8.5 trillion at the end of 2021. They are now below $7 trillion, according to new data from Refinitiv Lipper provided to CNN.
The ESG world has been ravaged by ongoing debates over the merits of sustainable investing, the challenge of determining what counts as an ESG investing company, and evolving global regulations. These headwinds, combined with a bleak economic outlook, created an unattractive environment for ESG-related funds.
Reaction from all sides: US politicians on both sides and business leaders have accused companies of “greenwashing” their financial statements to make them appear greener than they actually are. Companies such as asset manager DWS and Goldman Sachs have recently been accused of using the ESG label without merit.
In May, Elon Musk on Twitter called the ESG rating a “scam” after Tesla was removed from the S&P ESG index, while Exxon, which has a long history of causing environmental damage, remained.
This is because ESG rating agencies tend to rate leading companies relative to others in their same industry, so oil and gas companies are rated separately from automotive companies.
They may rate an oil driller very well against its peers, but a renewable energy company can rank poorly compared to others in its industry.
These counterintuitive results have added to a growing movement by the political right in the US to ditch asset management firms entirely that invest and vote with ESG values in mind.
Elected officials in states in favor of the Republican Party have objected to the “values” they claim these funds promote, saying they are not necessarily representative of their constituents.
A large number of Republican-led states, at least 20, have said they will remove ESG-focused companies such as BlackRock from asset management in their state retirement plans. So far, BlackRock has lost more than a billion dollars in commitments because of these changes, according to Robert Jenkins, head of Lipper Research at Refinitiv.
A debate over how to regulate ESG funds also adds to the troubled picture. Standardizing ESG criteria will reduce investor confusion, experts say, but the current struggle to do so is actually making things more confusing.
More than 1,000 ESG-related regulations have been issued for the global investment industry alone, according to an analysis from Principles for Responsible Investment, a United Nations-backed group that promotes ESG issues.
More recently, the US Securities and Exchange Commission required ESG-labeled funds to invest at least 80% of assets in line with the funds’ stated ESG objectives, which is a step in the right direction, according to Jenkins.
Executives at red light: the future doesn’t look good. American companies are bracing for recession and reconsidering their approach, according to new research from KPMG.
A third of US CEOs said they have already paused or reconsidered ESG initiatives, while another 59% say they will reconsider their efforts soon, according to the annual survey. Even so, 70% of respondents said they have seen ESG programs improve their companies’ financial performance.
What does that mean: climate change could cost $2 trillion a year by 2100, according to the White House, and corporations and governments will have to make drastic changes to avoid even greater monetary and human costs. But the obstacles faced by investing in ESG show that this is easier said than done.
Source: CNN Brasil
Joe Jameson, a technology journalist with over 2 years of experience, writes for top online news websites. Specializing in the field of technology, Joe provides insights into the latest advancements in the industry. Currently, he contributes to covering the world stock market.
