ESG investment strategies are being probed for deceptive labeling, criticized for excluding firms like Tesla Inc. and questioned as to whether they actually work. All this, some sustainable fund managers said, could be a good thing.
Tough scrutiny of loosely regulated funds with higher environmental, social and governance standards could help the industry, these managers said. Investors would welcome better ESG definitions, greater transparency and easier ways to find funds that match their own goals.
“I do think the silver lining is more product innovation rather than just saying, ‘oh, ESG leaders,’” said Todd Sohn, a technical analyst at Strategas Securities. “Let’s focus on minority leadership and other large scale, community-type opportunities that are out there,” like the Impact Shares YWCA Women’s Empowerment ETF (ticker WOMN).
Governments are stepping up investigations into ESG claims. The Securities and Exchange Commission is examining whether Goldman Sachs Group Inc.’s ESG funds failed to meet their promised metrics. Deutsche Bank AG’s Frankfurt offices were raided by police in May over accusations of “greenwashing,” or overstating ESG capabilities.
Tesla’s removal from the ESG version of the S&P 500 Index sparked a debate about which companies do — and don’t — pass muster with socially aware investors. And some critics say environment-focused funds may not even be working, since global emissions continue to rise.
As questions swirled around ESG, the sector’s exchange-traded funds saw record outflows in May, according to data from Bloomberg Intelligence.
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AXS Investments’ Greg Bassuk said this means investors have learned not to blindly “flock to the next big thing.”
“It’s not a lack of performance or not delivering on what the products are designed to do, but the lack of education and a mismatch in investor expectations with outcomes.” Bassuk, chief executive officer at AXS, said by phone.
Aoifinn Devitt, chief investment officer at Moneta, said that questions about ESG -- an acronym coined in the mid 2000s -- are to be expected for a still-evolving investment category.
“There will naturally be exaggeration, marketing hypes, overpromising, underdelivering. That’s going to be the nature of it. There’s been a lot of criticism of the whole category of ESG,” Devitt said by phone. “That is just an inevitable fallout or kind of a collateral damage when you have a massive transformational change in the industry like this.”
Lisa Langley, chief executive officer of Emerge Canada, expects that ESG flows will eventually stabilize.
“All of this is actually a healthy shakeout,” she said. “The outflows don’t really flip me out because we’ve seen outflows in the industry more generally, and it is possible that you don’t have to sacrifice performance. Communicating that message is going to give more energy into this space.”