Are the knives out? Recent articles in The Economist and FT suggest that if they are not, investors may be having more than second thoughts.
Until the end of 2022, ESG- Environmental, Social, and Governance – resembled a great river fed by three tributaries, the first by far the largest. Coined by the United Nations (2004), ESG has utilised the proxy power of fund managers to effect change.
Switzerland ran the original feasibility study (2004 to 2008) and by 2018 it was a world- recognised term.
Since then, it has grown exponentially, attracting widespread support and, under one of its many definitions, accounting for 10% of global investment assets.
An ancillary industry developed as corporates employed staff and hired consultants to audit their progress. In 2021, PWC revealed its true scale, announcing that it would hire 100,000 staff (a £12bn investment over five years) ‘to help its clients address ESG’ (Source Reuters).
Since then, the UK (April 2022), the European Union, Singapore (January 2023) and Switzerland have either specifically regulated or indicated an intent to do so.
The USA has lagged, employing existing legislation to enforce ESG. Notwithstanding the zeal of political leaders, business executives have found ESG to be extremely expensive.
Recently, against the backdrop of a deteriorating economy, a countermovement has gained momentum and governments have been forced to react. The best way to assess whether ESG is declining, is to review its political support, narrative, and key data.
Firstly, UK and Europe have passed specific disclosure laws, but the USA has not.
Critics, such as Republican Vivek Ramaswamy, have made the arguments international, highlighting disparities between jurisdictions and poor fund performance.
For example, Switzerland has opted for self-regulation and, since 2022, 78% of ESG funds have underperformed the MSCI (source: MSCI Manager).
US politicians have argued that ERISA managers have a fiduciary duty to maximise returns before anything else and have filed circa 100 anti-ESG legislative bills. In the USA, UK, and Sweden they have also questioned screening practices which deny shareholders the performance of oil and defence stocks.
Secondly, the narrative has shifted in the investment industry and politics. Larry Fink, CEO of Blackrock lobbied incessantly for ESG from 2016 to 2022.
However, in 2023, he abandoned the term. His annual statement blamed the excessive politicisation of ESG.
In a more subtle pivot, Jamie Dimon, CEO of JP Morgan, shifted from eulogising ESG to criticising both investor and government apathy.
Political leaders are also talking differently: the UK Prime Minister has postponed key environmental milestones, encouraged more oil exploration in the North Sea and the Defence Minister openly criticised ESG for undermining industry.
Thirdly, in 2022 net inflows into US and European ESG funds fell by c.80% (source Morningstar), and in 2023 fund outflows have accelerated.
The US has now witnessed five consecutive quarters of outflows. Observers also believe that ESG is unbalanced as Europe represents more than 80% of global investment assets.
In the USA more than half of all states are now opposed to ESG (Source: Bloomberg). ‘Median support for environmental proposals that rose to 49.4% in 2021 fell sharply to 25.5% in 2022 and continued falling, reaching 16% in 2023’ (source: Institutional Shareholder Services).
In conclusion, although ESG is not over yet, funds are closing, and the terminology is shifting to ‘stakeholder capitalism’.
Whether ESG has too many masters (shareholders, staff, customers etc.) we will see if some of them vote with their feet. In the end, the market will determine the fate of ESG as if capital continues to drain away, political support will too.
Mark Davies is managing director of BCMGlobal
