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Page 1 — Stop sustainability
Page 2 — There is also legitimate criticism
Three letters once signaled a new era on Wall Street: ESG. They stand for the concepts environmental, social
and governance. What this means is that investors use sustainability and good corporate governance as criteria when selecting the companies in which they invest. Although there have been investors who take environmental protection and social aspects into account since the 1970s, they had a niche existence until a few years ago.
The breakthrough for the ESG criteria came four years ago when BlackRock boss Larry Fink, the world‘s largest asset manager with more than nine trillion dollars, committed himself to it in an open letter. BlackRock would make sustainability the center of its investment approach, Fink said in an open letter to the heads of companies in which the investor held a stake. He announced nothing less than a “fundamental revolution in finance,” and others followed.
“For a while, every new fund seemed to have the three letters in its name,” says Robert Jenkins, global head of research at fund data analyst LSEG Lipper. ESG funds and other ESG investment products have become the fastest growing category in the financial market. In 2016, global assets in sustainable investment products amounted to almost $23 trillion; at the end of 2020 it was $35 trillion, an increase of more than 50 percent. Climate activists celebrated the green turnaround on the capital market. Analysts predicted By 2025, ESG assets worldwide would reach over $50 trillion – at least a third of global investment capital.
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But now Fink has backed down. At an event last summer, the BlackRock boss stated that he wanted to distance himself from ESG. He’s not the only one. Last year, more ESG funds were closed than new ones were opened. The USA experienced the greatest slump: more sustainable US funds were closed there in 2023 than in the previous three years combined. “We definitely saw a decline in demand in 2022 and 2023,” said Alyssa Stankiewicz, deputy head of sustainability at fund ranking agency Morningstar. Instead of continuing to grow as expected, ESG assets fell back to $30 trillion last year.
Only moderately successful
One reason for this was their recent moderate success on the stock markets. For a long time, sustainable investing had a shadowy existence on Wall Street because it had the reputation that the focus on the environment and social justice came at the expense of returns. “Then we did a 180-degree turn here in the U.S.,” says Morningstar’s Stankiewicz. The alleged brake on returns was now touted as a turbocharger. Small investors and professionals got involved.
But with the pandemic, the environment on the financial markets changed. The supply chain bottlenecks drove up prices and hit the initiators of wind and solar parks in two ways: the costs of raw materials rose and the central banks raised key interest rates to combat inflation. Higher interest rates hit capital-intensive projects such as green energy projects particularly hard.
Many of the ESG funds also put a large portion of their investors’ money into technology stocks. However, rising interest rates are dampening their attractiveness. Instead, investors prefer safer returns in the here and now. Stankiewicz is convinced that the realization that an ESG focus does not guarantee higher returns has led to disillusionment among many investors.
Is that a bubble? – The podcast for everyone who wants to understand economics
Improving the world or greenwashing: Can green investments save the climate?
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For a while now, banks and fund providers have been wooing their customers with a promise: increasing their savings while doing something for the climate. Green investing is booming. According to the German Fund Association, there were 575 billion euros in sustainable mutual funds at the beginning of 2022 – more than ever before. The problem: There is no clear definition of what exactly green investments are. And even a large provider like DWS, Deutsche Bank’s investment fund company, is faced with accusations that it has not invested its customers’ money as greenly as promised. How can you tell whether an investment product is based on sustainable business or just greenwashing? What does the abbreviation ESG stand for? And what is a green checking account? That’s what the new episode of Is that a bubble?, the business podcast from ZEIT and ZEIT ONLINE, moderated this week by Ann-Kathrin Nezik and Zacharias Zacharakis, is about. Our guest is Inas Nureldin, founder and boss of the Hamburg start-up Tomorrow, which promises its customers a “smart and sustainable banking experience”. He explains why sustainability and returns go well together for him and why he would like to see stricter regulation in his industry.
It didn’t help that asset managers like BlackRock were drawn into a bitter culture war raging in the US. Republican politicians claim the financial industry’s commitment to ESG is an unwarranted ideological influence. Some conservatively governed states are even trying to ban their billion-dollar public pension funds from investing according to ESG criteria. Some go one step further: pension fund administrators should no longer work with banks or fund companies that publicly promote such investment goals or offer them to other customers.
The most prominent anti-ESG politician is Ron DeSantis, the governor of Florida. Donald Trump’s rival for the presidential nomination banned Florida’s public pension fund from investing the nearly $190 billion in retirement benefits of public employees according to ESG criteria. “Corporations are increasingly using their power to impose their ideological agenda on the American people,” DeSantis said. He called ESG a “perversion”. Meanwhile, Texas’ Republican Secretary of the Treasury has banned the state’s public pension funds from granting mandates to asset managers such as market leader BlackRock because they are allegedly boycotting investments in “fossil fuels.” And in December, the Tennessee state treasurer sued BlackRockbecause the asset manager took ESG factors into account in shareholder votes and thereby misled Tennessee residents.
Republican representatives in 37 states introduced 165 proposed laws that would prevent municipalities, pension funds and authorities from applying ESG criteria. In his public departure from ESG, BlackRock boss Fink complained that ESG had been exploited “by the extreme right and the extreme left.” The Wall Street Journal recently reportedESG has become a “dirty word” among companies that avoid it in their communication.
Three letters once signaled a new era on Wall Street: ESG. They stand for the concepts environmental, social
and governance. What this means is that investors use sustainability and good corporate governance as criteria when selecting the companies in which they invest. Although there have been investors who take environmental protection and social aspects into account since the 1970s, they had a niche existence until a few years ago.
The breakthrough for the ESG criteria came four years ago when BlackRock boss Larry Fink, the world‘s largest asset manager with more than nine trillion dollars, committed himself to it in an open letter. BlackRock would make sustainability the center of its investment approach, Fink said in an open letter to the heads of companies in which the investor held a stake. He announced nothing less than a “fundamental revolution in finance,” and others followed.