In trying to find the most ideal title to today’s edition, there were a number of choices:
- ESG has become complicated.
- ESG may be complicated.
- ESG is a bit complicated.
All are true, and the complications started to become more prominent in early 2022. ESG, of course, stands for Environmental, Social, and Governance which are said to be “pillars” on which companies, particularly publicly traded companies, report. The pillars of ESG have been referred to as non-financial risk factors by the consulting firm Deloitte, and the non-financial aspect is partly what brought major pushback to “blanket policies” of ESG in major pension funds and investment funds.
In a number of ways, ESG emphasizes responsibility for the environment and the makeup of corporate boards of directors. These are positive factors in the ways investors can evaluate public (and all) companies. However, in a number of ways, ESG was inserted into publicly traded companies without enough emphasis on the basic downstream effects on positive financial performance of the companies employing (or being forced to employ) ESG.
This “profitability complication” literally led to more than one major corporate executive to determine that ESG is complicated. Nearly all major corporate brands and even a number of investment companies have now shed the description “ESG” from their corporate initiatives and committees. Certain pension funds have more than shed ESG, they downright pulled billions of dollars from ESG funds in 2023. Disappointing returns have led ESG funds to close and regulatory oversight has tightened in the sector.
Already in 2024, an additional 32 funds labeled as “sustainable” will close.* Lack of interest and pushback by investors are partly to blame. Stepped up oversight by the SEC also now makes it more difficult to simply re-brand to ESG funds without accurately stating how ESG data is factored into investment decisions.
All of the uproar over ESG could – and should – lead to better definitions of sustainability and more transparency in investment policy. A number of aspects of sustainability are downright responsible, as in measurement and consequent reduction in the amounts of water and power used in manufacturing. A responsible balance could be worked toward with respect to environmental and profitability factors.
For sure, next week at the World Economic Forum in Davos, Switzerland (where there will be OnCloud sneakers everywhere), the word “responsibility” may be the most heard word paired with investment presentations on ESG. Especially responsibility to investors and pensioners who rely on profitable, transparent, and cost-effective investments to further their livelihoods in retirement and their accumulation of retirement dollars.
*Data compiled by Morningstar and The Wall Street Journal.
This material has been prepared for informational purposes only and is not intended to provide, and should not be relied upon for, tax, legal or accounting advice.