After years of steady positive progress, ESG (environmental, social and governance) investing has now been dragged into the US culture wars. The backlash is well and truly under way, with green funds being blacklisted right, left and centre —many state legislatures are even mandating public employee pension funds to disinvest from anything even slightly green.
Experts say investor support for environmental and social shareholder proposals has fallen considerably, with the flow of US money into ESG-labelled funds slowing considerably after poor performance. Last year, big insurers Allianz, Lloyd’s of London and Vanguard pulled out of the sector’s net-zero commitment, seemingly fearing further attacks from republican politicians in the US.
The question is, will this trend begin to impact green funds in Ireland and Europe, where there is a laser focus on green investing and sustainable finance?
According to Rahim O’Neill, deputy director of Financial Services Ireland, ESG investing has always faced complex and myriad challenges.
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“The scale of the transformation that is under way is enormous and challenges are inevitable in this context,” he says. “The general objections are that ESG investing can be difficult for investors to define, or else create an economic ‘free rider’ effect and allow a third party to get an advantage by buying up cheap, non-sustainable investments.”
In recent years, ESG investing has ridden the coattails of a broader push towards sustainability in light of the climate crisis, he adds. “It is clear that the landscape has shifted in recent years, with ESG investment moving firmly into the mainstream and investor demand continuing for funds with ESG characteristics.” The key, he says, is to make sure that investors can make informed decisions, based on financial and environmental factors that are sound.
Despite the apparent — and growing — reversal seen across the Atlantic, O’Neill is adamant that this global trend and appetite for ESG shows no sign of abating. “With the EU’s sustainable finance framework, international agreements, investor demands, public and employee expectations and the significant culture shift in the finance sector, the trend is very much in favour of the ongoing development of sustainable finance.”
And he adds that while finance professionals in Ireland and the EU should be aware of developments in the US, generally the EU context is more practically applicable in their day-to-day role. “For those firms with portfolios that have some interaction with the relevant US states, they are already accommodating the changes but it’s unlikely that similar pushback will be seen in Ireland or Europe.”
Andrew Farmer, a director in KPMG Ireland’s Sustainable Futures practice, takes a pragmatic view of these recent developments. Regulators have done a great job in introducing ESG-related legislation to the funds market in the EU, but a narrow focus is not always the best one, he says.
“However, well-functioning markets will never be able to prescribe where investors choose to place their capital and the regulator should not be expected to police that choice of where to invest,” he notes. “If investors lose sight of risk factors that sit outside of ESG and are highly incentivised to only invest in green funds, European funds run the potential risk of experiencing adverse conditions from an overconcentration in green assets, as would be the case for any other asset class.”