The ESG fund sector is heading for a “shakeout” after trillions of dollars were poured into it, as per the man who coined the “ESG” acronym.
The shakeout of ESG funds
Paul Clements-Hunt said that the finance sector sprinkled the magical powder of ESG on many products that have nothing to do with environmental, governance, and social risks. He added that ESG funds were in danger, including benchmark indexes invested in Russia.
In a telephonic interview, Clements-Hunt, who runs Blended Capital Group, an advisory firm in Nairobi, said that anyone using sustainability, green, or ESG as a purely for marketing is heading towards trouble.
As per Bloomberg data, the invasion of Ukraine by Russia has exposed the dubious choices that fund managers made by selling ESG investments. Such funds had around $ 8.3 billion in Russian assets, including investments in bonds sold by the Russian Government and State-owned energy companies.
The ESG funds have grown like an industry that has been embraced by Wall Street Giants and Financial Hubs in Europe. The ESG label is put on everything from ETF to credit default swaps and loans. According to analysts at Bloomberg Intelligence, approximately $40 trillion assets are there in the global market.
56-year-old Clements-Hunt says that individual and institutional investors are asking plenty of questions and are no longer accepting ESG claims on products at face value.
Morningstar Inc. researchers have stripped off the ESG tag from about 1200 funds and valued at $1 trillion in assets under management after it found that they did not deserve the ESG label. After correction, there are still $2.7 trillion funds under ESG as per Morningstar.
European regulators have introduced new rules to ensure that those funds with ESG tag live up to their claims on sustainability.
Clements-Hunt created the term ESG in 2004 when he was working for United Nations then. He stressed that the term ESG is conflated with ethical investment. He said that addressing these challenges led to opportunities to make money.
Cements-Hunt has been working on sustainability since early 1990. He ran a finance initiative program for United Nations Environment where targeted bankers and investors to put money to address issues like income inequality and environmental degradation.
It was a huge success—financial institutions representing assets worth $130 trillion committed to reducing greenhouse gas emissions. Everyone from Deutsche Bank AG to BlackRock Inc. to HSBC Holdings Plc is now saying that ESG is vital for their business.
Others like Jerome Dodson, founder of Parnassus Investments, Matt Patsy of Trillium Asset Management, Tariq Fancy, former head of Blackrock sustainable investing, feel the time is ripe for a crackdown on ESG funds.
