The end of ethical investing appears to be at hand. Or undergoing a serious rethink.That’s because investors have pulled more than US$14 billion out of so-called ESG — ‘environmental social governance’ — funds over the past year alone, according to bond rating service Morningstar.That includes $2.7 billion in the third quarter ended September 30. .Driven by poor performance and the subsequent withdrawals, the value of assets in those ESG funds fell about 17% since the start of 2022 to about $298.8 billion as major funds were either liquidated or closed outright..If it continues, it could mark the end — or at least a turning point — for the ‘ethical’ or ‘moral’ investment movement that sought to influence corporate governance policies to promote environmental or social goals.“Although the motivations behind outflows cannot be perfectly quantified, many factors are in play. These include rising energy prices, high interest rates, concerns about ‘greenwashing’, and political backlash,” Morningstar wrote..‘Greenwashing’ is the practice of overstating — or even falsifying — to virtue signal non-existent environmental credentials. ESG investors have typically targeted big oil majors such as Shell and BP to pressure them to diversify away from fossil fuels. Instead, they’ve doubled down on the long-term outlook for fossil fuels. It comes after the share prices of renewable energy have cratered and major automakers such as Ford are backing down from ramping up electrical battery production. Driven by poor performance and the subsequent withdrawals, the value of assets in those ESG funds fell about 17% since the start of 2022 to about $298.8 billion as major funds were either liquidated or closed outright..Others moved away from ESG mandates, including big names in the US investing landscape, such as BlackRock and Columbia Thread Needle which dispensed with its $35.8 billion Social Bond Fund.Morningstar noted a lack of appetite for climate-related resolutions in particular is a sign of flagging investor interest in companies that tout to save the planet. Although the number of climate resolutions introduced at shareholder meetings in 2023 hit an all-time high, support for them was at its lowest.“We saw a steep rise in the number of shareholder resolutions at US companies addressing environmental and social themes. We also saw a drop in average shareholder support for these proposals, as the topics being addressed became more specific over time and split opinion among asset managers over their materiality and impact,” wrote Lindsey Stewart, a Morningstar CFA..“All this means we’re a long way from the heady optimism of COP26 two years ago when finance was expected to lead the transition to a decarbonized economy.”Morningstar bond rating service.It comes as climate-related financing requirements will be at the forefront of discussions between countries attending the COP28 climate summit in Dubai this month.At pervious summits, countries — including Canada — vowed to reform financing laws for so-called climate change investing.“All this means we’re a long way from the heady optimism of COP26 two years ago when finance was expected to lead the transition to a decarbonized economy,” Stewart wrote. “Now, with the financials sector having extensively deliberated the shape and span of new climate and sustainability regulations, the limits of the actions it can take have become much clearer.” Still the recent outflows are a drop in the bucket of ESG funds. According to Bloomberg, 14,500 ESG-labelled funds worldwide control about $7 trillion as of August 2023.
The end of ethical investing appears to be at hand. Or undergoing a serious rethink.That’s because investors have pulled more than US$14 billion out of so-called ESG — ‘environmental social governance’ — funds over the past year alone, according to bond rating service Morningstar.That includes $2.7 billion in the third quarter ended September 30. .Driven by poor performance and the subsequent withdrawals, the value of assets in those ESG funds fell about 17% since the start of 2022 to about $298.8 billion as major funds were either liquidated or closed outright..If it continues, it could mark the end — or at least a turning point — for the ‘ethical’ or ‘moral’ investment movement that sought to influence corporate governance policies to promote environmental or social goals.“Although the motivations behind outflows cannot be perfectly quantified, many factors are in play. These include rising energy prices, high interest rates, concerns about ‘greenwashing’, and political backlash,” Morningstar wrote..‘Greenwashing’ is the practice of overstating — or even falsifying — to virtue signal non-existent environmental credentials. ESG investors have typically targeted big oil majors such as Shell and BP to pressure them to diversify away from fossil fuels. Instead, they’ve doubled down on the long-term outlook for fossil fuels. It comes after the share prices of renewable energy have cratered and major automakers such as Ford are backing down from ramping up electrical battery production. Driven by poor performance and the subsequent withdrawals, the value of assets in those ESG funds fell about 17% since the start of 2022 to about $298.8 billion as major funds were either liquidated or closed outright..Others moved away from ESG mandates, including big names in the US investing landscape, such as BlackRock and Columbia Thread Needle which dispensed with its $35.8 billion Social Bond Fund.Morningstar noted a lack of appetite for climate-related resolutions in particular is a sign of flagging investor interest in companies that tout to save the planet. Although the number of climate resolutions introduced at shareholder meetings in 2023 hit an all-time high, support for them was at its lowest.“We saw a steep rise in the number of shareholder resolutions at US companies addressing environmental and social themes. We also saw a drop in average shareholder support for these proposals, as the topics being addressed became more specific over time and split opinion among asset managers over their materiality and impact,” wrote Lindsey Stewart, a Morningstar CFA..“All this means we’re a long way from the heady optimism of COP26 two years ago when finance was expected to lead the transition to a decarbonized economy.”Morningstar bond rating service.It comes as climate-related financing requirements will be at the forefront of discussions between countries attending the COP28 climate summit in Dubai this month.At pervious summits, countries — including Canada — vowed to reform financing laws for so-called climate change investing.“All this means we’re a long way from the heady optimism of COP26 two years ago when finance was expected to lead the transition to a decarbonized economy,” Stewart wrote. “Now, with the financials sector having extensively deliberated the shape and span of new climate and sustainability regulations, the limits of the actions it can take have become much clearer.” Still the recent outflows are a drop in the bucket of ESG funds. According to Bloomberg, 14,500 ESG-labelled funds worldwide control about $7 trillion as of August 2023.
