"ESG" Is There No Turning Back?

After the hot trend of ESG (Environmental, Social, and Governance) investment products in the past three years, the halo has gradually dimmed.

According to Morningstar's quarterly data analysis, the proportion of new funds in the United States and Europe containing the name "ESG" has dropped from a peak of 8.3% to 3.3%. Similarly, Google data shows that online searches for "ESG investment" have fallen back to mid-2019 levels. According to LESG data, the number of times the term ESG is mentioned in company analyst conference calls has also dropped by 59% from the quarterly peak in 2022.

Part of the reason is that clean energy stocks, which are most closely related to the ESG movement, have been hit hard. The slowdown in electric vehicle sales has impacted industry giants like Tesla, with the S&P Global Clean Energy Index falling by 12.25% this year, sharply contrasting with the 10% increase in the S&P 500 index during the same period.

From 2019 to 2022, the rise of ESG investment coincided with the soaring valuations of clean technologies, but now the situation has reversed. Since the beginning of the year, investors have withdrawn $2.2 billion from funds focusing on the low-carbon sector, with outflows increasing in scale every week. This indicates that ESG may be just a short-lived investment trend rather than a financial revolution across industries.

For investors, ESG investment can be seen as a choice to pay a premium for ethical goals. Against the backdrop of generally declining fees for actively managed funds in recent years, asset management companies' ESG products actually charge higher fees. Morningstar data shows that in U.S. equity funds, the asset-weighted average fee for ESG strategies is 0.52%, compared to an overall average of only 0.33%.

However, higher fees have not translated into better returns. Setting ESG stock selection criteria greatly limits the number of available targets and increases the difficulty of allocation. Taking the example of Danish wind turbine manufacturer Vestas, which saw its price-to-earnings ratio climb to 534 times in 2022, it illustrates the risk of stocks with high sustainability scores being hyped to overvalued levels, leading to lower returns.

Moreover, according to a report from the Leibniz Institute cited by the media in February, ESG rating systems are actually very chaotic, with significant differences in ratings given by different rating agencies to the same company, even in specific factors such as "environment," "social," and "governance." Researchers also found that environmental factors are often the most critical part of the overall score.

With the low returns of ESG investments, asset management institutions have also recognized the situation. The world's largest asset management company, Blackstone, no longer uses the term ESG, while J.P. Morgan and DWS Group Investment Management announced their withdrawal from the Climate Action 100+ climate investment alliance in February this year Media analysis points out that in the past few years, the driving force behind the ESG investment boom may have originated from the desire for thematic investments. However, investors have now found more specific thematic products to meet their needs, such as investing in batteries, cloud computing, and aging population