Not so long ago, Wall Street had a particular obsession with ESG investing, which favors companies that promise to make certain strides on the environment, societal impact and corporate governance. Nearly every CEO of a major company touted their firm's progress toward creating a more sustainable future.
Now the term is falling out of favor. S&P 500 companies citing "ESG" on earnings calls last quarter reached their lowest number since the same quarter in 2020, according to FactSet data.
Dedicated ESG funds have also lost popularity with investors. Total assets under management in ESG funds fell by about $163.2 billion globally during the first quarter of 2023 from the year before, according to data provider Lipper.
ESG has become a dirty word on Fox News and among Republicans in Congress. What's followed is a growing conservative backlash against corporate social and environmental initiatives.
About half of US states are enacting provisions to block efforts to invest in state-run investment accounts with an ESG lens, Lipper found. A coalition of Republican-led states sued the Biden administration in January over rules that would allow 401(k) managers to consider climate change factors when selecting investments.
But even environmental advocates think the term has outlived its usefulness.
What's happening: It's time to throw the ESG name into the wastebasket, says Lynn Forester de Rothschild, founder of the Council for Inclusive Capitalism.
The term has become too politically charged and needs to be replaced with something more meaningful, she told CNN Business.
ESG "created the elements of its own demise," says Rothschild, who regularly convenes global leaders like King Charles II, President Bill Clinton and Archbishop of Canterbury Justin Welby to discuss ways to make the global economy more inclusive and sustainable.
Efforts like Rothschild's got businesses on board with embracing sustainability as an investment in their bottom lines -- climate change poses an existential threat to many businesses across a large number of industries. But Wall Street focused more on green dollar signs than the green future.
"Investment companies, especially mutual funds and ETFs, are increasingly using terms such as 'ESG' and 'sustainable' in their fund names to attract hundreds of millions of dollars from investors even when there has been little or no change in the fund's investment holdings—a practice known as 'greenwashing,' said Stephen Hall, legal director at Better Markets, a nonprofit that promotes public interest in financial markets.
Money managers have run with the term, added Rothschild and charge extra money for ESG investing "without doing the hard work" of determining how companies were actually changing their environmental footprints and instead using "meaningless checklists."
Those checklists have allowed companies like tobacco giant Philip Morris and gas titan Shell to end up in ESG funds.
Acronyms tend to take on a life of their own, especially in the finance world, said Rothschild. "So I think this acronym, ESG, should go away." Still, she added, the principles behind it are more important than ever. "We need to lose the term I believe, and double down on the objective," she said.
ESG, said Robert Jenkins, head of global research at Lipper, is simply a buzzword at this point, the "artificial intelligence of six years ago."There were companies built on selling ESG information, ESG-related conferences "and it got worn out," he said.
What comes next: Regulatory agencies and governments need to reinforce environmental measurement requirements and objectives. "We need to regulate climate disclosure and create metrics that are verifiable and standardized, and available to investors and to consumers," said Rothschild.
Others agree that rules and reporting need to be more closely regulated.
Current metrics are vague and don't have specific measurement systems attached to them, Jenkins told CNN. He hopes that "more focused, thematic metrics can enable investors to target specific impact areas and have a better assurance that their money is actually going to benefit the desired outcome."
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