Asset managers need to demonstrate “that sustainability and alpha generation can go hand in hand,” Lim said. The industry is under increasing pressure to document its claims, as the regulatory framework develops, she said.

Client redemptions last quarter left a bigger dent in ESG funds than in conventional portfolios, Morningstar’s data show. Net outflows represented a decline of 0.1% relative to total global sustainable fund assets. For the broader fund universe, net outflows were equivalent to 0.05% of the total, according to the researcher’s analysis.

These ESG-Focused ETFs Were Hit by the Biggest Withdrawals During the Past Year | Below are the tickers for the four US-based funds

ESG isn’t about to disappear, but there also are “urgent challenges that need to be addressed,” Lim said.

The comments add nuance to a debate that’s often characterized by hyperbole. Republicans accuse ESG of being woke, anti-capitalist and anti-American. Sustainable investing purists dislike the label because they say it’s morphed into a meaningless fee-generating machine as emissions and inequality rise.

At BlackRock Inc., Chief Executive Officer Larry Fink continues to talk about the importance of the energy transition. However, he has said he no longer wants to use the ESG label because he finds it too politicized. The last time the world’s largest asset manager mentioned ESG in an annual report to describe its engagement priorities with portfolio companies was 2022, according to an analysis by Bloomberg Law.

Overall, corporate executives are talking much less about ESG these days. Mentions of the label in fourth-quarter earnings calls with analysts and investors slumped to the lowest level since late 2020, according to data compiled by Bloomberg.

The polarizing nature of ESG has led a number of high-profile academics to argue in favor of retiring the label. Bob Eccles, a visiting professor at Oxford University who’s been writing about sustainability for more than a decade, has said the term ESG should be replaced with what he calls “material-risk factors,” which will continue to take important environmental, social and governance issues into account when making investment decisions.

“The term ‘ESG investing’ should just die,” Eccles said.

Investors can still pay attention to the issues that ESG represents, even if they aren’t wedded to the label itself, according to Elizabeth Pollman, a law professor at the University of Pennsylvania, who wrote a working paper in 2022 exploring the origins and uses of ESG.

As examples, she cites safety issues at Boeing Co., unionization efforts at Starbucks Corp. and strikes at automakers. All are obvious ESG issues that not only ESG investors should worry about, she said.

“The utility of the term ESG has waned as it became embattled, but awareness about various issues under ESG has grown,” Pollman said.

Eccles said that without a well-defined approach to sustainable investing, fund flow data will provide little real insight into what investors really think.

“ESG haters will celebrate outflows. ESG lovers will cry about them,” he said. For now, however, those numbers “mean nothing.”

This article was provided by Bloomberg News.

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