Recent Activity in ESG Investing — Summer Overview 2022 (2024)

ESG (Environmental, Social, and Governance) investing is certainly a hot topic right now. Whether you are a proponent or a critic— or you’re not sure yet — you can find plenty of facts and opinions on the subject.

The StartingUpGood team has checked out our favorite sources to bring you an overview of the latest available activity and research. Additional media outlets, like The Economist, continue to weigh in on the topic of ESG and we will keep you up to date on that content as well.

With so much going on around ESG investment, we have categorized some of the key points below:

• Growth: ESG or sustainable investing assets experienced massive growth from 2016 to 2021.
• Economic Downturn: Growth has slowed in 2022, with a rare outflow of assets in May. Many on Wall Street think that the economic downturn is driving these temporary ESG outflows.
• Criticism: Some analysts find flaws in the fundamentals of ESG investing. Critics point out inconsistencies in the practices of ESG rating agencies and a lack of standardized reporting.
• Critics: Some of the harshest skepticism of ESG has come from former industry insiders who have broken ranks.
• Regulation: Regulatory bodies and policy makers worldwide are addressing the risk of greenwashing by working to standardize ESG labels and disclosures.
• Recent Events: Several high-profile incidences have garnered increased attention and scrutiny in 2022.
• What’s Next? Calls for ESG strategies to pursue positive environmental and social impacts, like impact investing, rather than just mitigating financial risk.

Over the years, we’ve observed a full cycle of the sustainable and social investment sector — from something barely anyone had heard of or was paying attention to, to one of the hottest trends in the investment industry, with ESG investments garnering trillions in assets.

With this growth comes increased attention — and criticism. It’s not just skeptics who think changes are needed. Many “insiders” express frustration in inconsistent definitions, overstated impact, lack of measurement standards, and the potential for greenwashing.

There are larger questions at play:

• Are the areas of environment, social, and governance too broad to group together into one category?
• Who is responsible for regulation — governments, free markets, companies, or investors?
• Is ESG investing actually making a difference or is it mostly marketing?

Since things are changing quickly, this will be our first — not last — curation of current ESG research. We also plan to compare ESG investing and impact investing, since the terms are often used interchangeably even though they’re different. In future articles, we will examine how ESG opportunities and setbacks may impact StartingUpGood’s four focus areas of startups, impact investing, corporate venturing, and the Sustainable Development Goals.

ESG or sustainable investing assets experienced massive growth from 2016 to 2021.

• “ESG assets surpassed $35 trillion in 2020 up from $30.6 trillion in 2018 and $22.8 trillion in 2016 reaching a third of current total global assets under management, according to the Global Sustainable Investment Alliance.” (Global Sustainable Investment Review, 2021)
• “Last year investors put a record $69.2 billion of net new deposits into sustainable funds, a 35% increase over the previous record in 2020, according to earlier Morningstar data, as investors focused on issues like climate change and workforce diversity.” U.S. sustainable funds mark rare outflow in May (Reuters, 6/16/22)
• “ESG assets are on track to exceed $50 trillion by 2025, representing more than a third of the projected $140.5 trillion in total global assets under management, according to Bloomberg Intelligence’s (BI) latest ESG 2021 Midyear Outlook report.” ESG Assets Rising to $50 Trillion Will Reshape $140.5 Trillion of Global AUM by 2025, Finds Bloomberg Intelligence (Bloomberg Intelligence, 7/21/21)

Growth has slowed in 2022, with a rare outflow of assets in May.

• “The onset of a bear market this year, driven by rising interest rates and concerns over a potential recession, is testing investors’ ESG commitments. U.S. sustainable funds recorded a rare monthly outflow of $3.5 billion in May, according to Morningstar.” Analysis: Bear market puts ESG investing to its first big test (Reuters, 7/13/22)
• “Even before then, inflows to these funds had slowed. They took in $7.5 billion in the first five months of this year, compared to $35 billion in the prior period.” Analysis: Bear market puts ESG investing to its first big test (Reuters, 7/13/22)
• “ESG equity funds faced headwinds in their portfolios on two fronts this year. Technology stocks, which ESG funds tend to be overweight on because they are perceived as more environmentally friendly, underperformed the broader market. And oil and gas stocks, which many ESG funds are underweight because of concerns about climate change, outperformed thanks to a rally in energy prices following Russia’s invasion of Ukraine.” Analysis: Bear market puts ESG investing to its first big test (Reuters, 7/13/22)

Many on Wall Street think that the economic downturn is driving these temporary ESG outflows.

• “Investment bank Morgan Stanley , whose equity analysts said last month that the ‘softening in ESG sentiment’ did not represent a ‘structural slowdown.’” Analysis: Bear market puts ESG investing to its first big test (Reuters, 7/13/22)
• “‘Most sustainable funds are equity funds, leaving them vulnerable to ongoing share price declines,’ said Jon Hale, Morningstar director of sustainability research. ‘The market is the factor driving outflows. It will turn around once the market turns around,’ Hale said.” U.S. sustainable funds mark rare outflow in May (Reuters, 6/16/22)
• “As geopolitical challenges mount and inflation concerns grow, there is a natural tendency for companies to seek safe harbor, to focus on maximizing returns as the measure of value of a company. Proponents of this view argue that the rise of stakeholder capitalism and its broader focus on a company’s impact on shareholders, the environment, and employees and communities distracts companies from their core mission of producing value… So how are we to settle this debate? We can let the market guide us. People are telling corporate leaders that they expect more, and consumers are shifting their spending to businesses they feel good about. Investors are demanding more on environmental, social, and governance (ESG) to understand which companies are creating broad-based value sustainably.” Stakeholder Capitalism Is Capitalism (Council for Inclusive Capitalism, 7/8/22)

Some analysts find flaws in the fundamentals of ESG investing.

• “For all their suspicions about their critics’ motivations, several advocates of more sustainable ways of doing business acknowledge the limitations of ESG, which is as ambitious in scope as it is ambiguously defined.” The war on ‘woke capitalism’ (Financial Times, 5/27/22)
• “The financial services industry cannot solve the environmental emergency or social injustice; at best it can play a supporting role to governments.” How to Make Sustainable Investing Work (Financial Times, 7/13/22)
• “Much of the current crop of ESG / sustainable funds are, arguably, standard trackers minus fossil fuel-heavy companies.” Why ESG reporting needs to balance ‘purpose with profit’ for real impact (WEF, 5/23/22)
• “So, while investors might be thinking they own slices of the most ethically and socially conscious companies, they probably just own less of the worst.” Is ESG Investing a Good Approach? Perhaps, But There Are Pitfalls (The Motley Fool, 7/12/22)
• “You’ll pay far higher expenses for a fund with similar stocks but worse performance.” The Many Reasons ESG Is a Loser (WSJ Opinion, 7/10/22, paywall)
• “Companies do overclaim on their ESG credentials. Asset managers do make implausible judgments as to which assets can be described as ‘green’. Financial markets are indeed short-term, and climate change is a long-term issue.” How to Make Sustainable Investing Work (Financial Times, 7/13/22)
• “The emphasis that many ESG strategies put on avoiding risk — especially of the reputational sort — rather than achieving positive impact. That very often leads investors to ‘downweight’ developing markets, or avoid them altogether — either because of concerns about social and governance flaws, or a simple lack of data.” How ESG strategies hurt emerging markets, (Financial Times, 6/22/22)

Critics point out inconsistencies in the practices of ESG rating agencies and a lack of standardized reporting.

• “This is further complicated by ratings agencies’ use of different methodologies, metrics and weighting schemes to assess social risks. Scores can vary widely from one firm to another as a result.” Explainer: What is the ‘S’ in ESG investing? (Reuters, 7/19/22)
• “A major stumbling block for investors and asset managers is the lack of uniformity in ESG reporting. There are a host of reporting standards, both nationally and internationally, some mandatory, many voluntary, which hinder meaningful comparisons. Different rating providers may, therefore, give varying pictures of the same company.” Why ESG reporting needs to balance ‘purpose with profit’ for real impact (WEF, 5/23/22)
• “ESG ratings as they are today are suboptimal and focus more on the impact the world has on companies rather than how companies affect the world — this is ineffective…” ESG 2.0: From Corporate Proclamations and Doing Less Harm to Putting Our Money Where Our Mouths Are (Sustainable Brands, 7/12/22)
• The The ESG Mirage (Bloomberg, Dec 10, 2021) report condemns MSCI, the largest ratings agency with ~ 40% of the market that rebranded in 2019 to focus on ESG: “the largest ESG rating company doesn’t even try to measure the impact of a corporation on the world. It’s all about whether the world might mess with the bottom line.”

Some of the harshest criticism has come from former industry insiders who have broken ranks.

Tariq Fancy, former CIO for Sustainable investing at BlackRock

• “In an excoriating 2021 essay, he argues that climate change needs a broad systemic response, not an initiative led by the finance industry.” How to Make Sustainable Investing Work (Financial Times, 7/13/22)
• Fancy wrote a fourth article in June 2022 criticizing the economic system of sustainable investing and purpose, arguing that ESG investing is primarily marketing and PR-driven. It’s long but interesting. Fancy is a proponent of government and regulatory control, comparing regulations to referees in professional sports. His recent TedX talk covers similar material.

From The Secret Diary of a ‘Sustainable Investor’ — Part 4 (Epilogue) (Medium, 6/20/22):

“Ten months ago, in August 2021, I published a three-part essay entitled ‘The Secret Diary of a ‘Sustainable Investor’ that went viral and sparked a debate in the press and the business community. I challenged business leaders who advocated the newly-packaged but mostly bankrupt free-markets-self-correct ideas I questioned to offer a serious rebuttal. None did. As a former insider, I have a good idea why: none exists for most of what I questioned…

The growing public thirst for action is met by unverifiable and non-binding pledges and misleading PR statements from the business community…

Larry Fink is right that stakeholder capitalism must take root. But he’s wrong about how it will come about: it can only come about on the timelines required to meet the rhetoric if we subject the most important provisions to mandatory rather than voluntary compliance…

Most people, including in the financial services industry, don’t know or are willfully ignorant of the fact that fighting climate-related financial risks is not the same as fighting climate change.

Desiree Fixler, former head of ESG for the Deutsche Bank-backed asset manager DWS

• “‘[ESG] has become a bureaucratic tax,’ according to Desiree Fixler, who blew the whistle on investment manager DWS’s greenwashing, ultimately forcing the company to reduce its ESG-denominated assets by 75 per cent. How to Make Sustainable Investing Work (Financial Times, 7/13/22)

Stuart Kirk, HSBC Asset Management’s former head of responsible investment

• Stuart Kirk speaking at the FT Live Moral Money Summit Europe conference (YouTube), “accuses central bankers and policymakers of overstating the financial risks of climate change.”

• “‘Climate change is not a financial risk that we need to worry about,’ says Stuart Kirk, HSBC Global Asset Management’s former head of responsible investing, who resigned last week... Climate change is real, he suggests, but is not a relevant consideration for investors.” How to Make Sustainable Investing Work (Financial Times, 7/13/22)
• “But, by god, at least he was provocative. And backed it up with data. An alternative headline for Kirk’s appearance might have been, ‘Banker Says Something Interesting at an ESG Conference.’ Which may have been more along the lines of what Kirk was shooting for.” ESG and its discontents: A defense of HSBC banker Stuart Kirk and a critique of ESG orthodoxy (Impact Alpha, 7/13/22, paywall)
• “Which is why I’ve been gathering a crack group of like-minded individuals together to deliver what is arguably the greatest sustainable investment idea ever conceived. A whole new asset class… To be announced later this year, the first project will underline the central argument in my speech: that human ingenuity can and will overcome the challenges ahead, while at the same time offering huge investment opportunities.” Stuart Kirk’s resignation announcement (LinkedIn, 7/8/22)

Regulatory bodies and policy makers worldwide are addressing the risk of greenwashing by working to standardize ESG labels and disclosures.

• “For decades, investment products or managers could describe themselves as ‘ESG’ without having to do anything to prove it.” How to Make Sustainable Investing Work (Financial Times, 7/13/22)
• “Regulators and activists have become concerned that U.S. funds looking to cash in on the popularity of ESG investing may be misleading shareholders over their products’ underlying holdings, a practice known as ‘greenwashing.’” U.S. SEC unveils rules to ensure ESG funds follow through on investments (Reuters, 5/27/22)
• “Overall, across all asset classes, the role that regulation plays will be significant.” ESG Assets Rising to $50 Trillion Will Reshape $140.5 Trillion of Global AUM by 2025, Finds Bloomberg Intelligence (Bloomberg Intelligence, 7/21/22)

International

• “The International Financial Reporting Standards Foundation has started work to provide the equivalent of global financial reporting standards for ESG.” How to Make Sustainable Investing Work (Financial Times, 7/13/22)
• “Developments that may prove helpful in this respect for investors include the International Sustainability Standards Board (ISSB), which aims to provide a global baseline of disclosure standards on ESG to measure and report against.” ESG 2.0: From Corporate Proclamations and Doing Less Harm to Putting Our Money Where Our Mouths Are (Sustainable Brands, 7/12/22)

EU

• “Regulators are making progress, with the EU leading the way in regulating corporate sustainability reporting. Its Non-Financial Reporting Directive (NFRD) and Sustainable Finance Disclosure Regulation (SFDR) require respectively disclosure of non-financial information and evidence that ESG risks are integrated into investment decision-making.” Why ESG reporting needs to balance ‘purpose with profit’ for real impact (WEF, 5/23/22)
• “The EU’s ‘sustainable finance taxonomy’ now defines what counts as green.” The war on ‘woke capitalism’ (Financial Times, 5/27/22)

UK

• “The detailed requirements for transition plans are the remit of the recently formed Transition Plan Taskforce, which includes policymakers, members of the Financial Conduct Authority (FCA) — the UK’s financial services regulator — and representatives from the finance industry. The TPT will build on the current international standards set out by the Taskforce on Climate-Related Financial Disclosures (TCFD), and publish its findings by the end of this year. These will include how to treat Scope 3 carbon emissions, which cover everything from the start of a company’s supply chain to the final use of its products and its employees’ commuting. That range makes them harder to measure and manage than Scope 1 emissions, which are simply those directly from a company’s own operations, and Scope 2, which arise from the energy it purchases… Near-term goals are another area to watch. ‘If 2050 is the only bit of your transition plan, you don’t have a transition plan…’” UK aims to set the pace for corporate net zero plans (Financial Times, 7/18/22)
• “The UK Financial Conduct Authority on Wednesday published a report saying there is ‘a clear rationale’ for it to regulate MSCI, Sustainalytics and the other firms that carry out ESG ratings and data. Crackdown looms for ESG ratings businesses (Financial Times, 7/1/22)

US

• “ESG investing faces pressures including scrutiny from U.S. regulators about how the funds are advertised, and pushback from some Republicans who say they take too much account of policy issues.” U.S. sustainable funds mark rare outflow in May (Reuters, 6/16/22)
• “In March 2021 the US Securities and Exchange Commission (SEC) announced that US companies must now report on climate risks facing their businesses, and their plans to address those risks, along with metrics on climate footprint.” Why ESG reporting needs to balance ‘purpose with profit’ for real impact (WEF, 5/23/22)
• “The U.S. Securities and Exchange Commission (SEC) on Wednesday proposed a pair of rule changes aimed at stamping out unfounded claims by funds on their environmental, social and corporate governance (ESG) credentials, and enforcing more standardization of such disclosures. The proposals, which are subject to public input, outline how ESG funds should be marketed and how investment advisors should disclose their reasoning when labeling a fund.” U.S. SEC unveils rules to ensure ESG funds follow through on investments (Reuters, 5/27/22)
• “The first rule would expand the Fund Names Rule to require that the investment theme in a fund’s name reflect at least 80% of the fund’s assets. The second rule would amend ESG Disclosures for Investment Advisers and Investment Companies to require funds to disclose ESG strategies, including how they define environmental, social and governance and how they vote their proxies.” S.E.C. rules would require funds to back up their ESG claims, (Impact Alpha, 5/26/22, paywall)
• “Industry groups warned, however, that the agency’s aim to standardize ESG labels could reduce investor choice.” U.S. SEC unveils rules to ensure ESG funds follow through on investments (Reuters, 5/27/22)

This NY Times opinion video criticizing Net Zero corporate commitments:

Several high-profile incidences have garnered increased attention and scrutiny in 2022.

Corporate Crackdowns

• “Police in May raided the European offices of Deutsche Bank’s DWS unit in an investigation of ‘greenwashing’ — saying its investments were more sustainable than they were. The authorities claim, ‘We’ve found evidence that could support allegations of prospectus fraud.’” The Many Reasons ESG Is a Loser (WSJ Opinion, 7/10/22, paywall)
• “The $1.5 million fine levied on BNY Mellon this week by the U.S. Securities and Exchange Commission over misleading ESG statements signaled the agency’s intent to crackdown on ‘greenwashing’ in asset management. The S.E.C. has followed up with two proposed rules to force funds calling themselves ‘ESG,’ ‘green,’ ‘sustainable,’ or ‘low carbon’ to market themselves more accurately and disclose their practices.” S.E.C. rules would require funds to back up their ESG claims, (Impact Alpha, 5/26/22, paywall)
• “In June the Securities and Exchange Commission announced an investigation into Goldman Sachs for claiming some of its funds were sustainable and ESG then they really weren’t.” The Many Reasons ESG Is a Loser (WSJ Opinion, 7/10/22, paywall)
• “SEC prods Bank of America on ESG tax credits: For the first quarter of 2022, Bank of America reported a 10 per cent effective tax rate, a figure well below its competitors. Goldman Sachs came closest with a 15 per cent tax rate. How was this possible? Bank of America routinely beat its Wall Street peers on tax bills with a not-so-secret weapon: ESG tax credits. These tax credits stem from investments in affordable housing and renewable energy, Bank of America reported. Without these breaks, the bank’s effective tax rate would jump to about 23 per cent, it reported — well above the industry average.” Crackdown looms for ESG ratings businesses (Financial Times, 7/1/22)

Supreme Court Ruling

• “In a 6–3 ruling, the Supreme Court yesterday narrowed the Environmental Protection Agency’s authority to regulate greenhouse gas emissions…The ruling essentially ‘closes the door’ on a federal cap-and-trade programme in the US.” Crackdown looms for ESG ratings businesses (Financial Times, 7/1/22)

Tesla & Elon Musk

• “On May 18, the S&P dropped Tesla from its S&P 500 ESG Index. Exxon is still in. The S&P explains why, unconvincingly citing ‘Tesla’s (lack of) low-carbon strategy.’ Tesla CEO Elon Musk tweeted, ‘ESG is a scam. It has been weaponized by phony social justice warriors.’ The Many Reasons Why ESG Is a Loser, (WSJ Opinion, 7/10/22, paywall)
• “Elon Musk, arguably this era’s most prominent capitalist, last week labelled ESG a ‘scam’ after Tesla, his pioneering electric carmaker, was removed from S&P’s ESG index.” The war on ‘woke capitalism’ (Financial Times, 5/27/22)
• “In May, Standard & Poor’s dropped Tesla from its sustainability index. As The New York Times explained, ‘S&P cited claims of racial discrimination and poor working conditions at Tesla’s factory in Fremont, Calif.’ That prompted a lawsuit by a state agency, which Tesla is contesting. S&P’s decision was also influenced by Tesla’s handling of an investigation by the National Highway Traffic Safety Administration into deaths and injuries linked to the company’s Autopilot driver-assistance system… If you just focus on the E, and you believe that Tesla is doing great things to enhance electric vehicles and battery technology, then the car company seems like a pretty solid bet. Tesla itself, in its annual impact report, eschews the term ESG. ‘As the world needs to strive for a substantial positive impact, we won’t be referring to ESG in this report,’ Tesla writes in the forward. ‘Instead, we’ll talk about Impact.’ ESG and its discontents: A defense of HSBC banker Stuart Kirk and a critique of ESG orthodoxy (Impact Alpha, 7/13/22, paywall)

Calls for ESG strategies to pursue positive environmental and social impacts, like impact investing, rather than just mitigating financial risk.

• “ESG in its fullest form hasn’t really been done yet. Its full potential is at the intersection of ESG and impact investing, where we can move from passive divesting and screening out of negative investments to proactive investments that generate long-term, sustainable profits.” ESG 2.0: From Corporate Proclamations and Doing Less Harm to Putting Our Money Where Our Mouths Are (Sustainable Brands, 7/12/22)
• “To bring the necessary rigour to ESG investing in the future, impact investing standards need to become the norm…Where ESG is often passive — avoiding something — impact is proactive, intentionally seeking to deliver a positive benefit.” How to Make Sustainable Investing Work (Financial Times, 7/13/22)
• “An ESG portfolio that reduces its allocation in ExxonMobil is less bad. A portfolio that eliminates it entirely is better, but a portfolio that buys First Solar in its place is both sustainable and responsible.” Is ESG Investing a Good Approach? Perhaps, But There Are Pitfalls (The Motley Fool, 7/12/22)
• “The whole term is ambiguous. For many professional investors, ESG investing is an approach through which to identify risks to a company’s financial health. Most individual consumers and retail investors, on the other hand, assume it means focusing on companies that act responsibly towards society and the environment. They are then often surprised to see a portfolio holding that has low exposure to ESG risk, but is not making a positive contribution. To further complicate matters, professional investors typically assess a company’s ESG credentials based on a balanced scorecard across multiple factors, whereas retail investors tend to focus on a single issue — plastics, fossil fuels, living wage.” How to Make Sustainable Investing Work (Financial Times, 7/13/22)

Investments focused on Environmental, Social and Governance metrics remain an active and important part of many portfolios. Evidence exists that companies with good governance practices, that also pay attention to their social and environmental impacts, outperform in the long-run. However, questions remain as to whether free markets reward long-term performance over short-term gains. Given recent world events and calls for regulation, what ESG investing looks likes in practice is likely to change substantially in the coming years. Our team will continue to bring you current and relevant information on these topics.

• Global Sustainable Investment Alliance.” (Global Sustainable Investment Review, 2021)
• U.S. sustainable funds mark rare outflow in May (Reuters, 6/16/22)
• ESG Assets Rising to $50 Trillion Will Reshape $140.5 Trillion of Global AUM by 2025, Finds Bloomberg Intelligence (Bloomberg Intelligence, 7/21/21)
• Analysis: Bear market puts ESG investing to its first big test (Reuters, 7/13/22)
• Stakeholder Capitalism Is Capitalism (Council for Inclusive Capitalism, 7/8/22)
• The war on ‘woke capitalism’ (Financial Times, 5/27/22)
• How to Make Sustainable Investing Work (Financial Times, 7/13/22)
• Why ESG reporting needs to balance ‘purpose with profit’ for real impact (WEF, 5/23/22)
• Is ESG Investing a Good Approach? Perhaps, But There Are Pitfalls (The Motley Fool, 7/12/22)
• The Many Reasons ESG Is a Loser (WSJ Opinion, 7/10/22, paywall)
• How ESG strategies hurt emerging markets, (Financial Times, 6/22/22)
• Explainer: What is the ‘S’ in ESG investing? (Reuters, 7/19/22)
• ESG 2.0: From Corporate Proclamations and Doing Less Harm to Putting Our Money Where Our Mouths Are (Sustainable Brands, 7/12/22)
• The ESG Mirage (Bloomberg, Dec 10, 2021)
• Tariq Fancy, former CIO for Sustainable investing at BlackRock: 2021 essay, TedX talk
• The Secret Diary of a ‘Sustainable Investor’ — Part 4 (Epilogue) (Medium, 6/20/22)
• Stuart Kirk speaking at the FT Live Moral Money Summit Europe conference (YouTube)
• ESG and its discontents: A defense of HSBC banker Stuart Kirk and a critique of ESG orthodoxy (Impact Alpha, 7/13/22, paywall)
• Stuart Kirk’s resignation announcement (LinkedIn, 7/8/22)
• U.S. SEC unveils rules to ensure ESG funds follow through on investments (Reuters, 5/27/22)
• UK aims to set the pace for corporate net zero plans (Financial Times, 7/18/22)
• Crackdown looms for ESG ratings businesses (Financial Times, 7/1/22)
• S.E.C. rules would require funds to back up their ESG claims, (Impact Alpha, 5/26/22, paywall)
• NY Times opinion video

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