Displaying items by tag: sustainability

In an article for CNNBusiness, Nicole Goodkind discussed some reasons why the ESG trend may have peaked and examines if it this is a positive development. 

In Q1, total assets under management of ESG funds declined by $163 billion. And, this trend has continued in Q2. This is despite ESG funds modestly outperforming the broader market. 

A major factor is that inflows into energy stocks picked up following the war between Russia and Ukraine. Another is that ESG investing is becoming a political issue with many conservative states looking to ban use of ESG considerations in investment decisions by state-run funds. 

According to Robert Jenkins, the head of global research at Lipper, ESG investing as a seperate entity will likely be phased out. Instead, ESG ratings will simply be another metric to evaluate investments. 

He sees ESG investing evolving into a more mature phase. This phase will be less hype-driven and politically contentious. Instead, the focus will be on standardazing data and ratings so that investors can make better decisions. Overall, it could certainly be positive as it would dissuade companies from ‘greenwashing’ to game ESG ratings, while still allowing investors to include these factors in their decision-making process. 

Finsum: ESG investing may have peaked in terms of popularity especially as it’s become a political target. However, the trend may be moving into a more mature phase.

In an article for Bloomberg, Marvin G. Perez covered Florida Governor Ron DeSantis’ latest move in his war against ESG. Lately, the movement for institutional investors to consider environmental, sustainability, and governance criteria in their investments has drawn criticism from conservatives.

Florida is increasingly the frontline for these political battles, so it wasn’t surprising to see the Republican-controlled State Senate approve a bill to abn state and local governments from using ESG criteria in making their decisions. Last month, the legislation passed the State House of Representatives and is expected to be signed into law by DeSantis soon.

DeSantis is looking to consolidate support as he is widely expected to enter the 2024 presidential race. He and others have criticized ESG investing as an overreach and symptomatic of ‘woke capitalism’. So far, Florida has pulled $2 billion from Blackrock funds which many consider to be the vanguard of the ESG movement.  

The legislation also bars municipalities from selling bonds that are connected to ESG projects or ratings. Last year, Florida sold about $13 billion in bonds, making it the fourth-largest issuer in the country. 

Finsum: Florida is increasing its efforts to combat ESG with the State Senate approving a bill that bars state and local governments from using ESG criteria in investments and selling bonds. 

In an article for AdvisorPerspectives, Larry Swedroe of Buckingham Wealth Partners discussed the conundrum of ESG investing. In essence, the asset class is currently outperforming which many are interpreting as a validation of ESG’s promise. 

Yet, Swedroe contends that this conclusion is incorrect, since it doesn’t include the effect of increased inflows. In fact, a recent study from Norway’s oil fund revealed that non-ESG stocks actually delivered superior returns over a longer time period. One potential explanation is that inflows lead to increased valuations for ESG stocks, while it leads to depressed valuations for non-ESG stocks. 

Another explanation for the conundrum is that ESG stocks are less risky, because they on balance tend to have higher compliance standards and risk-management protocols. In the long-term, stocks with higher risk profiles tend to have better returns albeit with increased volatility. 

Companies with higher ESG scores also tend to be larger than companies with lower scores. This is another complicating factor as smaller companies tend to deliver higher returns over the long-term due to the risk premium. 

Overall, investors should understand that ESG outperformance is likely to be a short-term phenomenon due to the surge of inflows. Over the longer-term, the asset class could see lower returns due to a lower risk premium.

Finsum: ESG investing is booming, and many believe the asset class will continue to outperform. Larry Swedroe explains why it’s not so simple.

In March, investors withdrew a total of $5.7 billion from US-listed ESG ETFs, leaving ESG funds with total assets of $81 billion according to reporting from Barron’s Lauren Foster. 

A major factor in the outflows was Blackrock rebalancing its passive holdings which resulted in a $3.9 billion outflow in a single day. Other factors that accounted for this were cited as political backlash, increased regulatory scrutiny, poor performance, and market volatility. 

In Europe, ESG flows are also depressed relative to 2021 but remain positive. In the US, it’s become a political issue as many conservatives are criticizing corporations for involvement in political affairs. Recently, President Biden vetoed legislation that would prevent pension funds from considering ESG factors in their investments.

There has also been some movement at the state level where conservative leaders are pursuing actions such as divesting from financial institutions that don’t invest in energy companies or companies engaging in political activity. So far, these efforst have failed but show that the tide could be turning against ESG.

Finsum: ESG funds saw major outflows in March due to a variety of factors. However, it’s clear that ESG is increasingly becoming a political issue. 

Over the last two months, there has been a 15% increase in the asset base of biodiversity funds according to an article by Natasha White of Bloomberg. This is a relatively new segment of the ESG market which saw a 150% increase in the number of funds last year. 

Overall, biodiversity is a fraction of the overall ESG market with combined assets of $2.9 billion. To compare, the overall ESG market is estimated to have $41 trillion in assets. The largest biodiversity funds are from Northern Trust, Axa Investment Managers, and Lombard Odier. All three are based in Europe, where there is a more defined regulatory environment. 

One catalyst for the asset class was the agreement at the COP15 summit in December of last year, where the Global Biodiversity Framework was signed by nearly 200 nations, with the intent to mobilize $200 billion annually to preserve and maintain biodiversity.

A challenge for the nascent fund class is the lack of standardized data on biodiversity which means there is disagreement on best practices and assessing impact. A larger issue is that many experts believe that the tradeoff between earning financial returns and maximizing biodiversity is too steep and thus can only be attained through public policy.

Finsum: Biodiversity funds have seen a 15% increase in assets over the last two months and a sharp boom in formation over the last couple of years. While there is agreement on the importance of preserving biodiversity, there are doubts whether it can be attained while generating positive returns for investors.