ESG investing is dying on Wall Street. Here’s why

A version of this story first appeared in CNN Business’ Before the Bell newsletter. Not a subscriber? You can sign up right here. You can listen to an audio version of the newsletter by clicking the same link.

The market for environmental, social and corporate governance, or ESG, investing is fundamentally broken.

The numbers speak for themselves. The cumulative flow of investments into US ESG funds has been flat to slightly negative since the first quarter of 2022, according to data shared exclusively with CNN by Lipper, a financial data provider.

In the US, assets under management in ESG funds declined from $339 billion in the second quarter to $315 billion by the end of September.

“ESG investing … entering the final quarter of 2023 continues to be a story of declining flows and assets under management,” said Robert Jenkins, head of global research at Lipper.

Jenkins told Before the Bell that the ESG concept doesn’t work and that going forward, he’ll be abandoning the concept and its measurements altogether — opting instead to think about responsible investing in a broader sense (more on that below.)

The problem with ESG investing, said Jenkins, is that you “can’t have materiality embedded within a metric in a qualitative fashion.” In other words, if you’re talking about something based on feelings or opinions (qualities), it’s really difficult to measure them without specific details (quantities or concrete things).

Before the Bell spoke with Jenkins about the future of ESG investing in the US and globally.

(This interview has been edited for length and clarity.)

Before the Bell: You say you’re finally done with ESG and retiring the concept. Why?

Robert Jenkins: I’ve always wanted to see the end of that term, I think I think it’s horrible. If you’ve ever been down in the weeds and tried to calculate true ESG scores for companies, you find out how impossible it is to bring those three very different analytical pillars together into a single score that actually tells you something meaningful about the overall company.

You have oil companies who know how to report into our overall metrics. And by the way, all the carbon intensive industries, whether it be oil, mining, or machine materials, are the most prolific reporters and they all write their own narrative into the methodologies of the various providers, and they know how to balance out the disclosures across the three pillars to give themselves a nice overall score. So it’s kind of cross current, a very different analysis for each of the three pillars that make any one pillar absolutely useless.

The idea around each of the pillars is still very important, and I’m a huge proponent of this space. But it’s gotten a little tired in the US and I think a lot of that is conflated by bipartisan issues, but ESG bonded on itself a little bit too, by having just such terrible metrics for people to look at.

We saw ratings from various companies, ours included, that made no intuitive sense. When you have a fracker getting an ‘A+’ on the environment and you have a company like Netflix getting a ‘D-‘ on the environment, that makes no sense.

Will ESG reemerge in a new way?

I think so. Artificial intelligence is probably one of the best things ever to happen for ESG because of the immense amount of data it can access and analyze. If you can incorporate the immense computational capabilities of an AI model into crunching all the data with transparency that will bring legitimacy back to it.

Let’s talk about flows and investing. What trends did you see regarding ESG investing last quarter?

Before the pandemic, we had kind of a nice, natural looking growth line to ESG products. Then the pandemic supercharged them and everyone started jumping on board. Firms were renaming products and putting them into ESG spaces, which showed up as an inflow.

Now, on the flipside, there’s a lot of division over ESG products in the US and people are relabeling the same products which show as an outflow.

It’s very difficult to measure, but I suspect there’s a bit of that showing up in our numbers. But it’s also important to note that overall, the market has had flat flows this year, it’s not just ESG funds.

Do you think that rising geopolitical tensions and oil prices have impacted flows into ESG funds?

I think Ukraine was a major tipping point. The anti-ESG sentiment in the US was festering throughout 2021 you know, but it was underneath the surface. But then the Ukraine war broke out and people started questioning whether we should invest in defense companies again and weapons manufacturers. People also started questioning energy and oil supplies. That was the tipping point, it pushed us over.

Geopolitically, the investment community has come to terms with these wars, at least in terms of the economic impacts and with what’s going on relative to the oil and gas industry and weapons manufacturers. So we’ve come to grips with that a little bit. But if these conflicts get worse, I think you’re going to see a lot of movement away from any sort of ESG thematic products into safe havens.

A lot of companies have avoided wading into the long-running Israeli-Palestinian conflict.

But when the barbarous scale of Hamas’s October 7 attacks on Israel became clear, staying silent ceased to be an option, reports my colleague Elliott Gotkine.

“Saying nothing speaks to cowardice,” said Jeffrey Sonnenfeld, a professor at the Yale School of Management who focuses on corporate leadership among other issues. “They’ll have a hard time celebrating their corporate character and what they stand for if they sit mutely on the sidelines.”

Many companies have since rallied in support of Israel. Microsoft (MSFT) CEO Satya Nadella said he was “heartbroken by the horrific terrorist attacks on Israel.” Sundar Pichai, his counterpart at Google, was “deeply saddened.” Disney (DIS) donated $2 million for humanitarian relief in Israel, and banks have contributed millions too, as Reuters reported. All in, around 80 household-name companies in America have condemned the Hamas attacks, as tracked by Sonnenfeld who maintains a list.

Many organizations, though, have opted for a more cautious approach, especially those outside of the United States. In the United Kingdom, Tottenham Hotspur Football Club, traditionally associated with its Jewish supporters, said it was “​​shocked and saddened by the escalating crisis in Israel and Gaza.”

Simply staying under the radar or equivocating are not viable responses, in the view of Lior Susan, founding partner of venture capital firm Eclipse.

“Not taking a stand is taking a stand,” Susan, who served in the Israeli special forces, told CNN. “Companies need to show moral clarity and leadership in the face of the Israel-Hamas war.”

Richard Griffiths, managing director at London-based strategic communications consultancy Citigate Dewe Rogerson, makes a similar point. “We saw with the Russian attacks on Ukraine that there is now a much greater expectation that companies should be seen to do the right thing and speak out,” he said.

However, with the Israel-Hamas war, he cautions, the situation is more complex. “This is a conflict between Israel and an internationally recognised terrorist organization,” he told CNN. “The wisest action for businesses now is to show solidarity with all those caught up in this, with a focus on easing the humanitarian aspect.”

United Auto Workers union President Shawn Fain told members that all three automakers have now offered record contracts but that the union will continue its strike in a push for even better deals.

“We’ve looked at the companies’ offers,” he told members on a Facebook Live negotiation update Friday afternoon. “In my opinion, and in the opinions of the vice presidents and in the opinion of your national negotiators, there is more to be won.”

Earlier on Friday, report my colleagues Chris Isidore and Vanessa Yurkevich, GM released the details of the latest offer it made to the UAW. It included an immediate 10% pay raise and 13 percentage points of additional pay increases over the life of a contract that would run through early 2028. That’s more money than GM had previously offered.