The Rise, Demise and Evolution of ESG Investing

Wealth Management Editor

Nov 22, 2023

Reviewed by: Mark Nacinovich

Edited by: Ron Day

Remember ESG investing?

Seems like only yesterday it was all the rage, claiming the zenith of investment splendor with the promise of better performance that also gave investors the warm fuzzy feeling of having a positive impact on the planet and its inhabitants.

The ferocious momentum, fueled by the likes of BlackRock Inc. boss and ESG cheerleader Larry Fink, seemed to crest in 2021 when ESG fund launches and assets hit all-time highs.

The buildup for all things environmental, social and governance was so orchestrated and the expectations so elevated, regulators had to step up and police companies from overstating their coveted ESG status. Because, for a time, the ESG label looked like a license to print money.

But that pesky practice known as greenwashing has quickly and quietly been replaced with whatever the opposite of pretending to be something is.

According to Morningstar, 13 ESG funds were shuttered during the third quarter and four more dropped their ESG mandates, marking the first time in recent history that ESG fund exits outpaced arrivals.

Of those funds still hoisting the ESG banner, investors pulled $2.7 billion during the third quarter, contributing to the $14.2 billion worth of outflows over the past year.

ESG Assets Contract

A Morningstar calculation of the organic growth rate of ESG funds, which is net flows as a percentage of total assets, shows that assets contracted by 0.85% during the third quarter.

By comparison, assets in U.S. funds overall were essentially flat during the period, down 0.02%.

ESG proponents, and there still are plenty, will often place the blame for the declining numbers on the politicization of the category and the flip-flopping leadership between the tech and energy sectors, which generally represent opposite sides of the ESG coin.

On the politicization issue, that falls into the category of being careful what you wish for, because just as ESG rode political bandwagons on the way up, it is riding them on the way down.

And that ride down is, in many ways, forcing the kinds of changes that will enable the asset-management industry to retain the best parts of ESG investing without the baggage or rigidity.

For instance, just like BlackRock has virtually eliminated the use of the ESG label in its promotional materials, instances of greenwashing are fading away as the wealth-management industry starts seeing the double-edged sword of taking political stands. But the analysis involved in calculating the environmental, social and governance factors when it comes to investing are unavoidable and here to stay.

As Eric Balchunas of Bloomberg Intelligence has often said, if you take the politics out of ESG investing, it’s just active management.

Contact Jeff Benjamin at [email protected] and find him on X at @BenjiWriter 

Jeff Benjamin

| Contact: [email protected]

Jeff Benjamin is the wealth management editor at etf.com, responsible for coverage related to the financial planning industry. This includes writing, hosting podcasts, webinars, video interviews and presenting at in-person events.

Jeff is a veteran journalist with more than 30 years’ experience covering the financial markets. He has won more than two dozen national and regional awards for his reporting. He most recently worked as a senior columnist at InvestmentNews where he wrote about investment products and strategies, as well as the broader financial planning industry. Prior to that, Jeff worked as an analyst at Cerulli Associates where he researched and wrote reports on the alternative investments industry. Jeff also worked as a money management reporter at Dow Jones Newswires, where he covered the mutual fund industry.

Based in North Carolina, Jeff is a former Marine and has a bachelor’s degree in journalism from Central Michigan University.

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