Following a decade of remarkable growth in US. strategies that integrate ESG criteria into their analysis and portfolio selection, the 2022 US SIF trends report released last month showed a significantly lower number of assets under management.
While some may say this data suggests we have reached “peak ESG,” or that this is a rebuke of “woke capitalism,” what we see is an important moment of reflection after a period of exuberant expansion in a decades-old field. This is an important step in the growth of sustainable investing — one that will empower people to make informed investment choices that are right for them.
Long before “ESG investing” became shorthand for any number of ways investors use environmental, social, or governance performance metrics, a small but vocal group of investors sought to align their investments with their values, investing with an intent to create positive environmental and social impact, and actively pushing companies to do better.
In response, the field of socially responsible investing emerged, allowing clients to align investments with values, ranging from religious to social activist. Responding to inquiries from not only these investors, but also employees, customers and other stakeholders, companies increasingly began providing information that would help answer questions about their social and environmental impacts and risks. Investor demand grew, and a proliferation of strategies using this information in a variety of ways all came to be labeled as ESG.
But ESG is simply data, not an investment discipline. This general label does not provide investors with much information about how ESG data is used in the investment process, or how that use may align, or not, with their individual investment goals. This lack of clarity has resulted in understandable frustration for investors and increased scrutiny from regulators.
Over the long term, the best response to this new environment is not to simply remove the ESG label from strategies, but to use the tools we have long advocated for — transparency and disclosure — to communicate how a particular investment product uses ESG and what the product’s aim is. Why? Because research continues to show that people care about environmental and social issues, and they deserve to know how ESG data is considered in the strategies they invest in.
And yet, in the face of data supporting deeper integration of ESG factors, asset managers in the US are facing politically motivated attacks on our ability to integrate any ESG data, potentially putting us at a disadvantage relative to global peers. Put forward under the guise of protecting the savings of hard-working Americans, not only do these bills prioritize the objectives of extractive industries and reactionary political forces over maintaining the responsibility of fiduciaries to make prudent investment decisions, they are already costing those same Americans money.
In this confused environment of political grandstanding, “exuberant” marketing claims and unclear use cases of ESG-labeled investment strategies, increased access to consistent and comprehensive ESG data is critical for investors, employees and consumers. Globally, we are seeing progress on regulatory frameworks that will help to support consistency in labeling and reporting. Unlike the anti-ESG legislation that is being proposed and passed in Republican-led states, these frameworks help provide transparency and clarity. And they continue to provide asset managers with the freedom to use information they deem helpful in decision-making. They also provide the end investors, those hard-working Americans these restrictive laws claim to protect, with the right to make an informed decision about their money.
Matt Patsky is the chief executive officer of Trillium Asset Management.
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