Tim Mohin: Is ESG Beyond Redemption?
Listen to this story:
2023 has been a tough year for the beleaguered abbreviation ESG, with a global backlash against the term and money pouring out of ESG funds, three headlines this week highlighted ESG’s rough patch:
NYT: “Is ESG Falling Out of Favor?”
Both the CNN and NYT articles refer to the declining capital flows into ESG funds, which just suffered their worst quarter. For the first time, US money managers closed more ESG funds than they opened.
The NYT article points to the Republican boycotts, a crackdown on greenwashing, and subpar investment returns leading to the shrinking ESG fund market. However, despite the slump, the ESG fund market isn’t going anywhere soon.
Related Article: Tim Mohin: ESG Backlash Hits Europe, Fails. Standards Clash
According to Morningstar’s Alyssa Stankiewicz, MBA, the main reason for ESG fund divestments was unmet “performance expectations” rather than sustainability advocates having “a change of heart about topics like climate change or diversity.”
CNN took a more negative view, claiming: “ESG investing is fundamentally broken.” Robert Jenkins of financial data provider Lipper said, “When you have a fracker getting an ‘A+’ on the environment and you have a company like Netflix getting a ‘D-‘ on the environment, that makes no sense.” He claimed he would abandon the concept and opt for “responsible investing” to drive capital toward sustainable endeavors.
The Financial Times article, an op-ed written by Stern School of Finance Professor Aswath Damodaran, opened with the scathing line, “Born in sanctimony, nurtured with hypocrisy and sold with sophistry, ESG grew unchallenged for a decade, but it is now facing a mountain of troubles, almost all of them of its own making.”
Damodaran criticizes ESG’s continually evolving vague definitions, unsubstantiated claims of reducing risk and increasing value, and the inconsistency of promoting both higher returns and lower risk. Ultimately, he concludes that ESG is beyond redemption, driven more by good intentions than sound financing.
This Smart Read article is contributed by Tim Mohin, Global Sustainability Leader, BCG. Every week ESG News delivers smart commentary from ESG practitioners and experts to unpack issues of the week. Email here if you are interested in submitting an article [email protected]