Wall Street darlings, ESG funds may be on the way out

New York, April 30

Environmental, social, and governance-focused funds, which were once deemed the darlings of Wall Street, may be on the way out, media reports said.

They're currently weathering a "perfect storm of negative sentiment," said Robert Jenkins, head of global research at Lipper, a financial data provider, CNN reported.

Despite the gloomy forecast, Jenkins remains optimistic. He sees this as a natural phase of the market's evolution. A new, more efficient system is taking shape that incorporates ESG standards into the bedrock of stock valuations, he said.

ESG investing as a separate entity could be on its way out, but the approach was wrong to begin with, said Jenkins. Instead, it should be integrated into the fundamental analysis of every investor.

Total assets under management in ESG funds fell by about $163.2 billion globally during the first quarter of 2023 from the year before, CNN reported.

In March alone, total assets under management in the responsible investments fund market fell by $6.8 billion.

It's not that the funds are underperforming, either. The average overall return for these funds was 2.2 per cent in March - outperforming the 12-month moving average return for the wider market by 2.8 percentage points.

Instead, a confluence of political, geopolitical and market events has severely damaged interest in ESG investing, CNN reported.

Russia's ongoing war in Ukraine forced traders to reconsider investing in energy and weapons stocks.

Responsible investing funds also came up against mighty economic headwinds last year. These funds' outsized investments in tech stocks and lack of energy stocks (which was the only positive sector in 2022), led to noticeable losses last year, CNN reported.

"I think ESG was overly trendy and it got caught up in itself," said Jenkins. "I was going to conferences two to three years ago, and I remember walking out and thinking 'these guys aren't saying anything new or different. They're all saying the same thing," CNN reported.

Companies jumped on to the bandwagon and greenwashing, a marketing tactic to appear environmentally conscious in investments, became prevalent. That, in turn, hurt the movement's reputation.

ESG won't be as glamorous as it was before, but it won't be a politically explosive term either, CNN reported.

"It's actually going to fade a little bit from its marquee nature, it's just going to be a part of sound business strategy and management," said Jenkins. "They're just going to be put alongside all the other fundamental analytics that we're so used to hearing about, your earnings-per-share and your GAAP accounting. ESG ratings will just become part of that toolkit for investment managers."