The rise and fall of ESG investing has occurred at breakneck speed. As recently as 2021, environmental, social, and governance investments appeared to be full of appeal for investors seeking to tap into a widespread appetite for sustainability and the ongoing clean energy transition. What went wrong?
Now, as Donald Trump begins his second term in the White House, could the famously skeptical President signal the death knell of ESG investing on Wall Street?
It didn’t take long for the sentiment to change towards ESG investing among institutions. Over the first three quarters of 2023, investors pulled more than $8.2 billion from sustainable funds, and the turning tide has rarely shown signs of abating since.
What’s Changed?
At the beginning of the decade, there was no shortage of investor appetite for ESG investing. 2021 saw Hartford Funds add the term ‘sustainable’ into the name of its core bond product, driving $100 million in investment volumes as a result.
However, by 2023, the asset manager was already pivoting away from its sustainability focus after missing its own performance targets as the financial landscape struggled amid 2022’s sell-offs.
The pivot back by Hartford Funds towards a more conventional investment strategy wasn’t an isolated incident. At least five other funds also announced that they were dropping their ESG mandates in 2023, while 32 sustainable funds announced their closure.
The flare-up of conflict in Ukraine was the turning point for anti-ESG sentiment, according to Robert Jenkins, head of global research at Lipper.
While Jenkins acknowledged that suspicion over ESG investing did exist in 2021, the Ukraine war was a ‘tipping point’ where investors began questioning whether defense investing could offer more upside.
This fundamental shift in sentiment was exacerbated by the emergence of ‘greenwashing’ on Wall Street, where more companies attempted to embrace the ESG hype machine by making bold environmental claims without being able to back them up.
As much as 72% of North American and 58% of global companies have admitted to greenwashing, while 43% of employees have been suspicious that their employers are also engaged in the act.
This widespread suspicion and new priorities caused environmental, social, and governance causes to lose momentum significantly, quickly pushing sustainable initiatives back into the doldrums.
The Rise and Fall of ESG
ESG’s boom period was nothing short of spectacular. Buoyed by shifting investor mindsets in the wake of the pandemic, 2020 saw ESG investment inflows more than double from the year prior to more than $250 billion. By 2021, flows into ESG initiatives had grown to $380 billion.
According to a CNBC report from 2019, 87 ESG products tracking around $16 billion of the United States’ $4 trillion total ETF assets underlined a significant untapped market opportunity. With Europe possessing around $124 billion in ESG ETF businesses, it appeared that there was significant room for growth moving into the 2020s.
Since then, the changing geopolitical landscape, along with suspicions over bogus ‘greenwashing’ claims, has caused sentiment to shift aggressively on Wall Street.
We’ve since seen names like JP Morgan, Goldman Sachs, and Morgan Stanley all dial back their ESG initiatives, with JP Morgan head Jamie Dimon suggesting that the firm will ‘punch back’ on laws in Texas requiring firms that do business with the state to pursue ESG initiatives.
Donald Trump’s return to power has seen many leading firms shift their priorities in the United States, with Meta vice-president of human resources Janelle Gale suggesting in a memo that ‘the legal and policy landscape surrounding diversity, equity and inclusion efforts in the United States is changing’.
With Trump placing all US government diversity staff on paid leave with immediate effect following his inauguration, it’s clear that Wall Street is shifting alongside a deeper changing narrative towards sustainability-focused investing.
Is There Any Hope for ESG?
Although sentiment towards ESG investing has changed, a 2024 US SIF member survey spread across 265 institutions found that 73% of respondents expected the market to grow over the next couple of years. Despite this, just 39% expected that their organization would increase sustainable investing due to ‘subdued’ market enthusiasm.
Despite this, there are still many success stories in the industry. Gender lens investing (GLI), for instance, which focuses heavily on businesses owned by women, has continued to grow even as Trump 2.0 looms.
Publicly traded gender lens equity funds manage $4.6 billion in assets, and private market investments in GLI have expanded by more than 30% over the past two years. As a result, the sector’s aggregate capital has reached $7.9 trillion.
This points to institutions benefiting from a more agile strategy when navigating matters related to environmental, social, and governance investments. Providers of prime services, like 26 Degrees Global Markets, can help by offering access to a broad range of products that may better align with institutions and their respective ESG expectations and requirements.
Redefining ESG
The future of ESG is likely to be a largely new entity with similar core principles. Although environmental, social, and governance causes are just as relevant today as in 2021, its name has been sullied by greenwashing and attempts to undermine its underlying causes.
In response, we’ve already seen a strong emphasis on circularity in a bid to champion sustainability in an ESG-wary environment.
Focusing on keeping materials in flow for longer and reducing the burn rate of natural resources, circularity can help to improve sustainability initiatives while lowering operating costs for firms engaged in the practice.
With H&Z Group data suggesting that a fully realized circular economy is potentially worth $4.5 trillion, we may already be looking at an initiative that could take over from where ESG left off.
The core principles of ESG remain relevant, and by embracing new perspectives, it’s possible for sustainability causes to recapture lost momentum at a time when Wall Street sentiment is up for grabs.
