Umbrella concept of ESG seen falling apart amid backlash

Environmental, social, and governance (ESG) investing accounts for concerns from gender equality to worker rights to new ways to provide funding to charities working in poor countries. ESG envisages an investing principle that prioritises environmental and social issues, and corporate governance.While institutional asset owners such as pension funds and insurers say they remain committed to sustainable investing, they’re less wedded to ESG as an "umbrella concept”.They now widely treat ESG as three separate parts as opposed to a single strategy, according to a survey by Morningstar of 25 asset owners across North America, Europe and the Asia-Pacific region.Organised efforts at responsible investing can be traced back decades. These approaches, which focused on screening out companies seen as doing specific kinds of harm, later came under the term "socially responsible investing”, or SRI.Over time, more companies adopted "corporate social responsibility” (CSR) policies amid increasing scrutiny of their business practices.Some investors also advocated what became known as impact investing as they sought to make a positive effect on the world, rather than just avoid the bad stuff.The biggest change under ESG was that SRI, CSR and impact investing were coming under a single umbrella just as ESG had been embraced by policymakers, regulators, and an ever-bigger number of investors.But the environmental part of ESG is now emerging as the primary focus for investors ahead of social and governance-related issues, with the majority viewing "climate as a material investment factor.”"Mainly, the asset owners seem less concerned about what ESG is called versus how it is implemented across their global portfolios,” according to the Morningstar report.Asset owners also are increasingly concerned these days about rising geopolitical tensions caused by the Trump administration-led trade war, the Russia-Ukraine conflict and US-China relations.The result is many investors are "waiting for more clarity before making short-term portfolio moves,” according to Morningstar.Investors lack financial incentives to chase sustainable targets, leaving them more exposed to losses once sentiment shifts, according to a study by academics at the University of Cambridge in May.Despite years devoted to trying to make ESG investing financially appealing, there still aren’t enough structures to encourage banks and asset managers to allocate capital in ways that will ultimately protect the planet and its inhabitants, scholars at the Centre for Sustainable Finance at the University of Cambridge Institute for Sustainability Leadership (CISL) wrote in the study.The upshot is markets have failed to provide adequate pricing signals for the real risks that lie ahead.ESG, which enjoyed a brief boom during the pandemic, has struggled to right itself as higher interest rates and supply-chain bottlenecks have hampered the progress of capital-intensive green infrastructure. As a result, the theme has rapidly lost investors, with Morningstar noting in April that ESG funds suffered their worst outflows on record in the first quarter.Corporate America’s pivot away from diversity, equity and inclusion (DEI) initiatives accelerated during the first 100 days of President Donald Trump’s second White House term.An area of corporate exchange that has seen a quieting under Trump is shareholder proposals at annual meetings.Proposals related to ESG topics dropped 34% from the number seen in 2024 as progressive activists dealt with an uncertain voting environment, according to a report released in early April by shareholder advocacy group As You Sow and Proxy Impact.Global sustainable investments are estimated to range between $35tn and $40tn. Amid mounting concern that only a fraction of such assets are bona fide environmental, social, and governance investing, there are calls for tougher regulations to stamp out the false claims by fund managers.