ESG investing is certainly at an inflection point. Once a niche market, ESG (environmental, social and governance) funds have become at least a $35 trillion behemoth, according to the Global Sustainable Investment Alliance. Compare that sum to the size of the U.S. economy, and the ESG investing sector is more than 50 percent larger than U.S. GDP.
The world of ESG funds is facing challenges from two fronts. First, there is plenty of doubt over whether many of these investments are truly “sustainable” or “socially responsible.” Part of the problem is the wide range of ESG ratings and rankings, a challenge that should sort itself out in the next several years as this industry goes through a shake-out and consolidation. Now that the U.S. Securities and Exchange Commission (SEC) has ESG transparency in its crosshairs, investors will have more verifiable information at their hands as they decide where to direct their funds. Bottom line: Whether or not this directive from the SEC endures, more focus on the “G” in ESG, as in governance, will help investors gauge whether a particular fund really is addressing climate change or ongoing social problems.
The other challenge ESG investing faces is growing attention from politicians who are eager to gaslight the public on ESG and make it the next CRT (critical race theory). Governors such as Greg Abbott of Texas and Ron DeSantis of Florida have led movements to ban ESG funds from their states' investment portfolios.
Such moves may score political points with some voters, but they fly in the face of market economics. Take the fundamentals of ESG: disclosure and reporting. A decade ago, only 20 percent of the S&P 500 issued some form of sustainability reports. By 2020, that ratio had surged to 92 percent, according to an analysis from Bloomberg Intelligence.
The backlash against ESG investment also overlooks the fact that, at a macroeconomic level, ESG funds are performing — and performing well. Yes, 2022 has been a massive bump in the road for ESG investing, as it has for just about any stock or fund — energy stocks and funds, of course, largely being a temporary exception. But at least one survey has found that 80 percent of ESG funds worldwide have outperformed the market during the three previous years. Investors have responded in kind, as inflows have gushed into such funds year after year since 2019.
More importantly, municipal and state investment funds aren’t looking for quick returns: They seek stability. In case you missed it, pension managers and their peers aren’t day-trading. They want to ensure secure and steady returns for the former employees who rely on such investments for their retirement. “Florida and other states, such as Texas and West Virginia, that vilify money managers for favoring ESG over fossil fuel, will need to reconcile their preference for unnecessary risk when they punish the ESG crowd. ESG produces higher returns with less volatility than traditional stock market benchmarks since 2020,” Bloomberg News’ Matthew A. Winkler wrote for the Washington Post last week.
Take the last 12 months, for example. True, conventional energy equities surged in value by about 72 percent (surprise!), according to Bloomberg data that Winkler cited in his article. Meanwhile, ESG funds overall lost about 11 percent. But since 2020, fossil fuel equities’ price volatility was 77 percent greater than ESG-aligned securities. For pension fund managers’ to gain stability and peace of mind (and keep their jobs), think of ESG funds for pension fund managers as a cup of chamomile tea night after night — while relying on energy stocks and funds are akin to slurping down cans of Red Bull.
For investors seeking financial stability, a focus on the long term is what matters, and that is exactly what ESG investing provides.
Investors get it, said the head of Ceres, Mindy Lubber, in an interview with TriplePundit’s Mary Riddle earlier this week. “Investors are excellent spokespeople [for ESG investing] because they want the companies to thrive and do well," Lubber explained. "When they meet with companies and ask them to manage climate and water risk and ask for a plan, the whole intent is to make the companies stronger, richer and do well over the long term.”
Image credit: Chris Liverani via Unsplash
Leon Kaye has written for 3p since 2010 and become executive editor in 2018. His previous work includes writing for the Guardian as well as other online and print publications. In addition, he's worked in sales executive roles within technology and financial research companies, as well as for a public relations firm, for which he consulted with one of the globe’s leading sustainability initiatives. Currently living in Central California, he’s traveled to 70-plus countries and has lived and worked in South Korea, the United Arab Emirates and Uruguay.
Leon’s an alum of Fresno State, the University of Maryland, Baltimore County and the University of Southern California's Marshall Business School. He enjoys traveling abroad as well as exploring California’s Central Coast and the Sierra Nevadas.