Industry shakeout rattles ESG marketas money flows out

Global sustainable investments are estimated to range between $35tn and $40tn.
And a boom in the use of environmental, social and governance (ESG) factors has fed scepticism that the approach is nothing more than a marketing gimmick, fuelling a backlash and regulatory crackdown.
ESG is part of a wider strategy known as sustainable investing. Broadly, the goals are to achieve societal impact, align with personal values or manage risks, proponents say.
An industry shakeout is now underway. But at the same time, ESG risks have become all the more prominent as extreme weather events and worker strikes have hurt automakers, insurers and travel companies.
In the US, ESG efforts have been derided by some state officials, claiming they prioritise liberal values at the expense of financial returns.
Florida Governor Ron DeSantis, a 2024 Republican Party presidential candidate, and other critics collectively pulled billions of dollars in state funds from BlackRock, an early champion of the cause. Republican-led states also introduced anti-ESG legislation, though those have largely failed.
The attacks sent a chill down Wall Street, prompting banks and investment firms to shy away from using the label in marketing documents and meetings with clients.
On the flip side, July 2023 ended up being the planet’s hottest month on record, focusing attention on the fallout of extreme heat and wildfires.
Hedge fund managers are piling into short positions in ESG stocks as they hunt for bogus green claims and valuations inflated by record stimulus.
ESG-related funds have returned 8.5% for the year through September 22, compared with 12% for the MSCI World Index and 9.9% for the STOXX Europe 600 Price Index, according to Bloomberg calculations. Still, since at least 2019, more ESG funds have launched than closed, according to research firm Morningstar Direct.
As the ESG label was adopted for financial products as diverse as mutual funds to complex derivatives, European and US regulators began to clamp down on firms they say are exaggerating their ESG bona fides.
In September, the US Securities and Exchange Commission adopted a rule that requires that 80% of a fund’s investments be in line with its stated focus.
In 2022, the SEC brought cases against Goldman Sachs Group and a Bank of New York Mellon Corp unit related to their ESG credentials.
Revisions to the European Union rules led fund managers to strip the top ESG tag from about €200bn ($215bn) of client funds from July 2022 to March 2023.
Asset managers selling funds into the EU risk having client flows “meaningfully” disrupted as regulators consider a major overhaul of ESG investing rules, according to analysts at Barclays.
The EU Commission opened the door to a wholesale review of the Sustainable Finance Disclosure Regulation last month, when it launched a consultation that has industry insiders bracing for years of upheaval.
The development means there’s a very real possibility the bloc will introduce an ESG fund labelling framework that would mark a departure from the current setup, according to Barclays analysts.
Some supporters think the term ESG has become so broad as to lose much of its meaning. Many point to the prevalence of greenwashing, which is when companies exaggerate the environmental benefits of their actions.
Other criticisms focus on the way fund managers rank companies by how they’re performing on ESG factors.
ESG investment strategies have been widely criticised this year, so much so that money is leaving the once-thriving part of the asset management industry.