Sustainability in focus amid investor backlash against ESG

Sustainability has for long been becoming a priority investment domain, increasingly viewed as an opportunity to create value. But the grant narrative around environmental, social and governance (ESG) has certainly changed.
A boom in the use of ESG factors in the financial world has fed scepticism that the approach is nothing more than a marketing gimmick, fuelling a backlash and regulatory crackdown.
ESG is part of the wider strategy known as sustainable investing. Broadly, the goals are to achieve societal impact, align with personal values or manage risks, proponents say.
But US scepticism toward ESG follows years of attacks by Republicans who accuse the strategy of being “woke” and anti-capitalist.
Financial firms have been navigating a fraught path in the US for much of the past two years.
At stake are more than a few letters.
The historic hurricane that battered the Caribbean and then Texas, and recent wildfires in California show the gravity of an overheating planet. And that’s stoking demand for niche but fast-growing corners of ESG investing, including climate-transition funds and debt instruments such as catastrophe bonds, where issuance is at a record high.
Also, global investment in the energy transition rose 17% last year to a record $1.8tn and the numbers continue to grow, according to researchers at BloombergNEF.
While some US firms, including Neuberger Berman, are sticking with ESG, others say the label is diminished. Jefferies Financial Group has replaced ESG in analysts’ job titles with the words “sustainability and transition.”
Wellington Management Co and Lazard Asset Management have cut jobs. Bank of America Corp has reorganised its ESG research team and merged the group’s activities with clean energy.
Another big worry is the possibility of a second Trump administration that would be even more hostile to climate initiatives and environmental regulation than the first.
Also, wind and solar, a big part of the green-energy pitch, has simply been a bad investment lately.
The S&P Global Clean Energy Index has plummeted more than 50% from its peak in early 2021, even as the S&P 500 ascended to record highs. As a result, US funds with ESG goals are falling out of favour. Despite gains in the broader stock market, the sector’s assets have fallen to roughly $335bn from a peak closer to $365bn at the end of 2021, according to researchers at Morningstar.
Still, there are those who believe ESG — or whatever it’s ultimately called — will play a key role in investment decisions.
JPMorgan Chase & Co and Citigroup rank among the top global underwriters of green bonds this year, while Bank of America, Neuberger Berman and Wells Fargo & Co sponsored conferences in New York and Chicago as recently as last month that focused on ESG topics. Some detractors 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.
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.
Just as the world saw record land and sea temperatures in 2023, so some research models have for long suggested up to a quarter of global GDP could be lost if no action is taken to reduce carbon dioxide emissions.
Sunday, July 21, 2024 was the hottest day ever recorded globally, according to preliminary data from the European Union’s Copernicus Climate Change Service.
Broadly, global sustainable investments are estimated to range between $35tn and $40tn.
Amid mounting concern that only a fraction of such assets are bona fide ESG investing, there are calls for tougher regulations to stamp out the false claims by fund managers.