ESG Unlocked: Is it time to draw the curtain on ‘ESG’?
What is the future of ESG investing? When addressing this question two years ago, the answer was everything will eventually become ESG as society shifts to a greener economy in the face of increasingly greater climate risks.
Fast forward to 2023 and the narrative around ESG has completely shifted. In the US, ESG has been politicised by the Republican party and the right-wing media to attack ‘woke’ asset management firms.
In Europe, the market is having to contend with regulatory confusion due to the impact of ‘level 2’ of the Sustainable Finance Disclosure Regulation (SFDR) which came into effect at the start of the year.
As a result, both proponents and critics of ESG appear frustrated at the direction of travel for the sustainable investment industry with critics going as far as to ban excluding businesses on ESG grounds, as highlighted by the Boycott Act that was implemented by 16 US states in 2022.
Proponents, meanwhile, are also exasperated. Earlier this year, whistleblower Desiree Fixler said the market should retire the term ‘ESG’ after a survey of 300 Bloomberg terminal users warned firms are under increased pressure to stop using ESG in conversations with clients.
“It is about time we retire the term ‘ESG’ and use clear, specific language in terms of risk management and value creation,” Fixler argued. “ESG has been politicised, exploited and phenomenally conflated. The hype and ambiguity of the term conveniently played into and helped fuel a culture war.”
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While the vitriol towards ESG has certainly gone too far, especially in the US, where ESG does suffer is around definitions. From broad-based and low carbon to Paris-aligned climate and biodiversity, ESG encompasses such a wide range of issues with many different interpretations that it can cause confusion for investors.
Whether it is time to draw the curtain on ESG and become more focused with the way the market talks about sustainable investing (p.17) is assessed in Chapter 2 of this report, alongside Thomas Kuh, PhD of 晨星 Indexes’ evaluation of what artificial intelligence can tell us about the sustainable investing space (p.20).
Elsewhere, the role of biodiversity – which is becoming an increasingly important part of the ESG ETF landscape – within portfolios is also analysed (p.24) as well as what impact regulation has had on the biodiversity craze (p.22). There is also a feature on green bond ETFs (p.26) while ETF Stream ’s Jamie Gordon looks at whether any asset class such as commodities or alternatives can be considered ESG (p.6).
We hope you enjoy this report which was sponsored by 晨星 , DWS Group , J.P. Morgan Asset Management , Euronext and MSCI Inc.