It, for sure, has been a bumper year for environmental, social, and governance” (ESG) investing.
A record $649bn was poured into ESG-focused funds worldwide through November 30 last year, up from the $542bn and $285bn that flowed into these funds in 2020 and 2019, respectively, according to the latest Refinitiv Lipper data.
Global sustainable investments are now estimated to range between $35tn and $40tn, while ESG funds now account for 10% of worldwide fund assets.
Extreme weather becoming more frequent and events highlighting social justice issues contributed to ESG rising to the top of the agenda of investors, companies and policy makers.
The MSCI World ESG Leaders’ index gained 22% late December, compared with the MSCI World Index’s gain of 15%.
Investors also flexed their muscle to challenge companies’ ESG credentials, culminating in a landmark board challenge against oil major Exxon Mobil Corp.
Support for social and environmental proposals at the shareholder meetings of US companies rose to 32% in 2021 from 27% in 2020 and from 21% in 2017, according to the Sustainable Investments Institute.
Of the $6.1tn in ESG funds, 59% of the money is held in Europe, Middle East and Africa, according to Lipper, reflecting the region’s earlier embrace of the investing trend.
But amid mounting concern that only a fraction of ESG assets are bona fide ESG investing, there are calls for tougher regulations to stamp out the false claims by fund managers.
Such warnings are becoming more frequent as the mood around ESG shifts.
Some industry insiders have levelled allegations of greenwashing against their former employers. And asset managers are starting to review how they label and sell ESG funds to avoid being named and shamed.
Positively, regulators have responded to the new pressure by making ESG disclosures a priority.
The US Securities and Exchange Commission has been asking money managers about the ESG classifications they use for their funds and is expected to firm up guidance on corporate disclosures such as carbon emissions.
The European Commission has also finalised most of its “sustainable finance taxonomy” rulebook on which corporate activities can be labelled climate-friendly.
For sure, it’s been bumper year of ESG flows. But what that means for the environment, social justice and good governance is unclear.
Hortense Bioy, the global head of sustainability research at Morningstar Inc, says she’s struck by the persistent lack of clarity around investing strategies marketed as ways to protect the planet.
No amount of scepticism, however, is denting the flow of cash.
Morningstar data show that at the end of the third quarter, European assets under management classified as sustainable jumped by 134% compared with the end of 2020. In the US, the increase was 40%.
Global ESG assets are on track to exceed $53tn by 2025, or more than a third of the $140.5tn in projected total assets under management, according to Bloomberg Intelligence. While Europe accounts for half of global ESG assets, the US is now picking up the fastest and may dominate the category starting in 2022.
The next wave of growth could come from Asia - particularly Japan, according to BI research.
Make no mistake, ESG is clearly a money machine for the finance industry. Its impact on the real world, however, isn’t always easy to discern.
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