The finance industry’s short-lived affair with “responsible” investing in the form of Environmental, Social, and Corporate Governance (ESG) is coming to an end. Investment managers, including BlackRock, are distancing themselves from ESG. BlackRock CEO Larry Fink announced at the Aspen Festival of Ideas that he will no longer be using the term “ESG,” which is significant considering BlackRock’s status as the world’s largest asset management company and its prior role in promoting ESG investment.
This shift away from ESG is not limited to BlackRock. RBC Capital Markets’ survey data reveals that 56% of sustainable funds are rebranding themselves as “thematic” rather than “ESG.” It seems that sustainable funds have recognized the toxic branding associated with ESG and are seeking alternative strategies.
Fink explained that he is abandoning the ESG terminology because it has become “politicized by both the left and right.” However, there are deeper reasons for this recent turn on ESG. When ESG gained popularity in the past decade, it was met with enthusiasm from marketing departments. However, those responsible for selecting stocks were less enthusiastic about the mandates associated with ESG. Modern investment heavily relies on quantitative analysis, with many individuals and computers monitoring the success or failure of portfolios. In this context, bad ideas cannot sustain themselves if a company is being properly managed.
From the beginning, ESG appeared dubious to investment professionals. ESG assigns scores to companies based on their compliance with environmental and social goals. However, the lack of well-defined goals and agreement on how to construct these metrics undermined trust in the data used for ESG investing. This lack of trust led serious investors to view the enthusiasm for ESG as annoying and irresponsible.
Another drawback of ESG was the difficulty in evaluating outcomes. Usually, finance relies on well-conducted studies to determine the effectiveness of investment strategies. However, the well-funded marketing campaigns surrounding ESG led to a multitude of studies with varying quality and conflicting results. This noise, without a clear signal, frustrated serious and results-oriented investment professionals.
Given these challenges and the current market conditions, it is not surprising that investors are growing tired of the ESG fad. With market downturns and concerns over the Federal Reserve’s monetary policy, investors are reevaluating their strategies. In such times, it is common for less serious strategies, such as ESG, to be discarded. ESG, which lacked substance from the start, is now being thrown under the bus.
Philip Pilkington, a macroeconomist and investment professional, analyzes and discusses these trends in the finance industry.
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