The outlook for ESG is getting bleaker based on the results of Bloomberg’s latest industry survey.
Most Bloomberg terminal clients taking the survey expect ESG funds to underperform general market benchmarks in the next year, while a growing number say ESG is nothing more than a passing fad.
Bloomberg recently concluded its second survey of terminal clients to get their views about environmental, social and governance principles. The results were broadly similar to the first survey at the end of last year, though clients “not directly engaged” in ESG are becoming increasingly more skeptical about the investment strategy than those who “are engaged.”
For example, almost 90% of 116 Bloomberg terminal clients who aren’t directly engaged with ESG expect the sector’s investment funds to lag behind market benchmarks in the next year, and 55% of 181 terminal clients who are engaged in ESG — and have more skin in the game — also are pessimistic.
The pessimism doesn’t end there. Almost 70% of those who aren’t involved directly in ESG say the investment strategy is nothing more than a fad, while just 18% of those who are engaged expect ESG issues to become more critical in business and markets, down from 25% in the earlier survey.
Still, only a small minority of all those surveyed say their firms are pulling back from packaging or investing in ESG products, in part because the vast majority of respondents agree that “we all have a role to play in protecting the world’s resources.” And most say Europe represents the industry’s largest opportunities.
Comments that accompanied the survey show the enormous split that exists between those who say ESG is here to stay and those who think it’s “a politically-driven ideology that has no place in a professional investor’s decision-making.”
The Bloomberg survey, the second conducted in the past year, included responses from 349 terminal clients in the two-month period ended June 29. About 60% of the respondents work in the US, where Republican-led backlash against ESG has been increasing since the start of last year.
House Republicans held a series of hearings in July, during which they called for quashing the Securities and Exchange Commission’s efforts to enforce more transparent corporate-disclosure requirements of ESG-related factors. In addition to taking on the SEC, GOP lawmakers are pushing for stricter oversight of proxy-advisory firms and also favor limiting — or even excluding — ESG-focused investments from Employee Retirement Income Security Act (ERISA) funds.
The political pressure was amplified in the survey with one respondent saying “ESG has morphed from risk management to political activism for the left” and another saying “our job is to provide returns for investors, not change the world.” The vast majority of anti-ESG comments — about 80% — came from terminal clients based in the US.
Roughly two-thirds of those surveyed who are engaged in ESG say the backlash will probably force firms to stop using terms such as ESG, while they continue to support efforts that lead to positive environmental, social and governance outcomes. Ultimately, however, a majority of all respondents expect politics to exit the conversation and be replaced by a more practical discussion about the future of ESG.
About half of those engaged with ESG mentioned that government regulation is the way that things will really change and 31% of those not engaged agreed.
The survey found that most respondents are involved in some aspect of ESG, whether it’s analysis, investing or products. What’s driving interest in the topic is mainly external factors such as protecting corporate reputation, responding to client needs and mitigating risk, rather than having a positive impact on society.
The respondents say it’s difficult to quantify “climate impact” with data-backed comparisons for companies and different industries. Still, 43% of those surveyed say their firms are scaling back investments in fossil-fuel and high-carbon assets and a further 21% are planning to do so.
Another theme that emerged from the survey was calls to separate the E, S and G as “they don’t belong together as a group; they’re totally different and unrelated issues.” The majority agree that the fiduciary responsibility of financial firms is more important than ESG.
--With assistance from Brad Skillman.
This article was provided by Bloomberg News.