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The growth of environmental, social, and governance (ESG) investing is experiencing a slowdown after decades of continuous growth. In the year 2000, ESG was virtually nonexistent, but by 2020, it had grown substantially, with approximately $35 trillion in ESG assets according to the Global Sustainable Investment Review.
ESG, as articulated in documents like the U.N. Principles for Responsible Investment, has gained widespread acceptance among global asset management firms. However, ESG has become largely associated with politically progressive causes, although it encompasses a range of priorities.
While ESG managers have attempted to influence various entities such as corporations, real estate developers, and governments, the average individual investor has often been unaware of the specific policies being promoted on their behalf.
Over the last few years, however, an anti-ESG movement has taken shape. (AP Photo/Mark Lennihan)
Recently, an anti-ESG movement has emerged, with the political left accusing ESG managers and companies of “greenwashing,” implying that they are insincerely capitalizing on climate and justice issues for commercial gain. Additionally, researchers, financial officers, and attorneys general have argued that ESG leads to underperformance and higher costs, violating fiduciary duty.
WHAT ESG INVESTING IS, AND WHY SOME POLITICIANS ARE AGAINST IT
Critics from the political right, including conservative presidential candidates, legislators, and pundits, share these fiduciary concerns and believe that asset management firms should not manipulate investor capital to advance progressive agendas without their knowledge or consent.
Consequently, the growth of ESG mandates has started to dwindle, with significant outflows of funds. Prominent asset managers such as BlackRock, SSgA, and Vanguard have already implemented changes to their proxy voting strategies in response.
The general public now has a heightened awareness of ESG, a concept that was less known just five years ago. Many are advocating for a return to a “back to neutral” approach, suggesting that investors should only focus on shareholder returns without considering the social impact of their investments.
While it is encouraging to see increased awareness and scrutiny of ESG and its specific agendas, completely forgoing values-based investing would be inadvisable.
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ESG brought attention to values-based and ethical investing, but this concept has a very long history. The idea that our financial decisions should align with our deeply held values has existed since civilization’s early days, as evident in ancient texts like the Hebrew Torah, the Koran, the Christian Bible, and Hindu scriptures.
Methods of screening investments based on ethical grounds can be traced back to figures like Methodist minister John Wesley, who discouraged investing in “sinful” industries. The modern activist investing movement can be traced back to the Episcopal Church’s efforts to address apartheid in South Africa, which resulted in changes to corporate practices.
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The response to the present-day ESG movement should not involve abandoning values in investing altogether, as that would be impractical. Instead, there should be a renewed discussion about how investors can express their values through their capital and create positive change in the marketplace.
Faith-driven investing offers one alternative. Approaches such as Muslim Shariah Investing, Biblically Responsible Investing, Michael Eisenberg’s “Covenantal Capitalism,” and Christian Faith Driven Investing enable investors to align their investments with their religious beliefs. This includes avoiding certain industries as well as advocating for policies that promote human flourishing, such as chaplaincy programs, adoption benefits, and efforts to combat human trafficking in supply chains.
While some values may overlap with those of ESG investors, many will not. These faith-based frameworks recognize the influential power of capital and the responsibility that comes with wealth.
Although faith-driven investing currently occupies a smaller space compared to ESG, the current crisis of confidence in ESG frameworks may lead to the emergence of a more diverse range of investment options.
It is worth noting that the faith traditions embraced by the majority of people worldwide provide an abundant source of constructive frameworks for values-based investing.
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All investing has an impact, whether positive or negative. It is encouraging to see individuals questioning the dominant ESG movement, but it would be unfortunate to abandon the idea of values-based investing altogether.
People have the desire and ability to create positive change in the world through their financial capital. Those who oppose conventional ESG practices must not only reject them but also present constructive visions for how capital can influence the marketplace positively.
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