• ESG criteria and the economic situation are causing uncertainty
• Regulation of ESG criteria could bring clarity
• Reassessment and realignment of ESG funds as an opportunity
Now, a study by Refinitiv Lipper, provided to CNN Business, records the highest capital outflow from so-called ESG funds since March 2020. In late 2021, assets under management in ESG funds peaked at $8.5 trillion, currently According to the study, it is less than 7 trillion US dollars, which corresponds to a decrease of almost 20 percent.
Why are investors pulling out of ESG funds?
The debate about the sustainability of the ESG criteria and which company meets the criteria, as well as the development of global standards, is causing uncertainty among companies and investors. Companies such as Goldman Sachs and Deutsche Bank subsidiary DWS are currently facing massive greenwashing allegations.
Investment companies like BlackRock are experiencing political headwinds from the political right in the USA because of their ESG funds. There it is criticized that the “values” that these companies represent with their ESG funds do not represent the voters and so these companies are also excluded from the administration of state pensions. BlackRock, for example, has already lost more than $1 billion in commitments, the head of Lipper Research told CNN Business.
The current global economic situation with concerns about inflation and interest rates is creating additional headwind. According to a survey by KPMG, more than 30 percent of companies in the USA have already restricted their ESG activities or even put them on hold in view of the gloomy forecasts. Almost 60 percent of the CEOs surveyed want to reconsider their ESG programs, even though 70 percent said ESG programs had a positive impact on their companies’ financial performance.
ESG criteria: criticism from all sides
The debate over the regulation of ESG criteria is also causing uncertainty: “Standardizing ESG criteria would reduce investor confusion, experts say, but the current fight over it only makes things more confusing,” writes CNN Business. The requirement of the US Securities and Exchange Commission (SEC) can be understood as a first step, according to which more than 80 percent of the fund assets must be invested in accordance with the declared sustainability criteria.
An example of the scope for interpretation that the ESG criteria currently leave, which has received a lot of media attention, is Tesla’s delisting from the ESG sustainability index of the S&P 500 in mid-May 2022. Elon Musk then vented his anger that Tesla, according to information of the index operator fell behind its competitors in “a broader ESG analysis”, but the oil multinational ExxonMobil is listed. This is due to the criteria, which are applied differently on the one hand, and on the other hand, in the case of the S&P 500 ESG, the individual companies are evaluated in relation to their competitors in the industry so that the sectors are also mapped according to the S&P 500.
What are investors looking for?
According to a study by Capital Group, institutional investors are more likely to look for funds that offer a broader range of ESG topics. They are looking for innovative financial products and want to invest in companies that are changing their business models over the long term. “Investors looking for access to a wide range of ESG topics are currently having to buy multiple funds, each with a single topic or a narrow focus. Our study results show a need for all-in-one solutions that enable investors enable us to look at sustainability from the broadest possible perspective,” sums up Jessica Ground from Capital Group.
The Ukraine war and the energy crisis marked a turnaround for ESG investing as ESG investors failed to benefit from the commodities boom, while it became clear that billions of ESG investments had flowed to Russia, according to Bloomberg. Added to this were the price losses in tech stocks and the rejection of ESG funds by the Republicans in the USA. “I don’t think investors will significantly reduce or exit their ESG allocations while waiting for better information, but they will continue to reassess and refocus their investment approaches,” Markus Mueller, of Deutsche Bank’s retail bank, told Bloomberg . A comprehensive debate on how to deal with economic change is necessary, according to Müller, in order to promote a “better flow of information that can underpin future ESG investment approaches”.
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