Are ESG funds actually sustainable?
Although financial industry groups claim that one-third of all investment assets are already sustainable, our research shows most ESG investing actually does not create any meaningful sustainability impact.
Critics portrayed ESG investing as primarily motivated by political concerns and a potential drag on returns. Additionally, some critics have raised concerns about the complexity and reliability of ESG metrics.
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.
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.
Unfortunately, a lack of clarity has led to "greenwashing" of some ESG funds. Now, investment funds must invest at least 80% of their assets in the strategy they are advertising in their name.
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.
Republican politicians have criticized ESG because they say they consider it an effort to use financial tools for the purpose of advancing liberal political goals.
Investors are withdrawing money from sustainable funds as the ESG enthusiasm of the past few years is waning amid high interest rates, poor returns, plunging renewable energy stocks, tightened SEC rules, and political backlash.
From a look at the headlines, it would be easy to conclude that ESG practices—short for environmental, social, and governance—are on the way out. Political backlash from right-wing Republicans in the U.S. has left many big financial institutions reluctant to talk about their ESG policies.
Comparing the MSCI USA Extended ESG Select Index to the S&P 500 Index, the MSCI USA Extended ESG Select Index outperformed the S&P 500 Index in all but one of the last seven years. In 2022, the S&P 500 declined by 19.44%, while the MSCI USA Extended ESG Select Index declined by 21.12%.
Why ESG funds underperform?
“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.
The firms' strong support of ESG investing in recent years has led some financial advisory firms and a segment of the public to question whether financial institutions should concentrate on financial performance rather than other considerations. BlackRock and Vanguard have a reputation for backing ESG initiatives.
The first group to coin the phrase ESG was the United Nations Environment Programme Initiative in the Freshfields Report in October 2005.
The 5 Top Anti-ESG ETFs by Assets Under Management
Strive Asset Management and Inspire Investing offer the largest anti-ESG funds: Strive U.S. Energy ETF (DRLL): $369.2 million. Inspire 100 ETF (BIBL): $294.5 million. Strive 500 ETF (STRV): $266 million.
When you choose ESG investing, you're putting your money to work in companies that strive to make the world a better place. This type of ethical investing strategy helps people align investment choices with personal values. ESG stands for environment, social and governance.
The key difference between ESG and sustainability is that ESG is a specific tool used to measure the performance of a company, while sustainability is a broad principle that encompasses a range of responsible business practices.
ESG proponents counter that Tesla scores well on environmental factors but falls short in terms of social and governance factors, leading to a poor overall score.
Tesla was cut from the index last year because of issues including claims of racial discrimination and crashes linked to its autopilot vehicles. The removal prompted Chief Executive Elon Musk to responds with tweets such as "ESG is a scam".
ESG is not just an acronym; it represents a powerful force that drives sustainable and responsible practices across businesses worldwide. Environmental stewardship, social equity, and robust governance are essential ingredients for creating a thriving and resilient future.
Over the next few days we will explore new reporting metrics and standards, and targets gathered from across companies and industries that you can utilize to produce a consolidated ESG framework that embeds LGBTQ+-inclusive diversity, equity, and inclusion.
What is the biggest ESG scandal?
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.
What the critics are saying: The claim that ESG investing can change corporate behaviour and sustainability outcomes for the better is an overreach. Companies selectively provide data to make themselves look more sustainable than they really are.
Anti-ESG lawmaking efforts, which first emerged as a trend in 2021, reached new heights this year with over 150 anti-ESG bills and resolutions introduced in 37 states. Most of these bills were rejected or failed to advance, but as of December 2023, at least 40 anti-ESG laws have been enacted in 18 states.
ESG Fund Returns Recover, but Still Trail Conventional Peers by a Small Margin. The tech stocks that helped ESG funds and the utilities that hurt them in 2023. Sustainable funds performed much better in 2023 compared with 2022, but results were mixed across asset classes.
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.
