To be frank, I have been skeptical of the ESG movement and ESG investment funds. I saw ESG metrics to measure company performance to be vague, vapid and superficial. I could not find specifics on what was “social” and how to measure “governance.”
For example, would “social” include a balance sheet asset for the “social capital” provided by the company’s culture and employees or for “human capital” the value-adding capacity of its employees? Or would “social” include a company’s contribution to the remediation of income inequality in a given community or country? Or the size of its charitable contributions to educational institutions or churches?
It was notable to me that the ESG movement did not seek to learn from the Net Impact’s approach being developed in The Netherlands by ABN AMRO and others.
The Wall Street Journal recently reported that in the U.S., the fund management community is quietly closing ESG funds or changing their names.
During the last quarter, more sustainability funds either were liquidated or removed ESG criteria from their investment decisions than were added to the sustainability category of funds.
Investors put money into sustainability funds starting in 2019. Such investments collapsed in 2022. So far this year investors have withdrawn $14 billion from sustainability funds.
Once again, in open markets, demand trumps supply. The driver of business success, of capitalism, is consumption – what people want to pay for. Goods and services that no one wants to buy will not, in fairly short order, be produced.
Goods and services that fulfill wishing and hoping are for charity or government subsidies.
Wishing, good intentions, pious hopes and idealism don’t create wealth, as Adam Smith so concisely noted. Reality can and does.
The returns on sustainability funds were unimpressive, especially as interest rates rose. And the U.S. Securities and Exchange Commission has adopted rules to restrict mere virtue signaling (or greenwashing) in the use of fund names.