Global investors distanced themselves from purportedly ‘ethical’ funds last year, pulling out over $10 billion amidst allegations of greenwashing.
Between 2020 and 2022, investors poured six times more capital into funds purportedly supporting companies with high ethical, social, and governance (ESG) standards compared to traditional equities. However, the tide turned against the sector last year, as evidenced by data from Calastone.
During its peak years, the sector amassed a total of $51.2 billion. Yet, a backlash ensued, resulting in investors withdrawing $10.2 billion from equity funds labelled with an ESG tag in the past year alone. The term itself faced scrutiny following remarks by Larry Fink, chief executive of the asset management behemoth BlackRock, who ceased using it, citing its politicisation by figures from across the political spectrum.
In response to concerns about funds making “exaggerated, misleading, or unsubstantiated claims” about their underlying investments, UK regulators are devising measures to restore trust in ethical investing.
According to the Calastone report, “A Japanese car manufacturer that has enhanced its governance standards — governance being a contentious issue for international investors in Japan — might qualify for inclusion in an ESG fund. However, an investor might assume that by selecting ESG funds, she is aligning with her environmental values, only to discover significant holdings in traditional industries like automotive, exhibiting little deviation from standard practices.”
European investors led the exodus from ethical funds, withdrawing a net $3.7 billion in 2023. Investors in Singapore followed suit, with outflows more than doubling to $712 million in the region.
Meanwhile, investors in the UK and US offloaded investments worth $1.2 billion and $292 million, respectively, contributing to a global equity outflow of $7.1 billion.
The report underscores the need for enhanced communication between the industry and consumers to build trust in the ESG category, stating, “Regulators and the funds industry acknowledge the need for improvement. In the UK, labelling standards are slated for significant tightening. However, the fundamental issue revolves around the definition of ESG. The industry must strive for clearer communication with its clientele to foster trust in the category.”
The Commons Treasury Select Committee initially called for action against ‘greenwashing‘ in financial products in 2021, warning that allowing each firm to devise its own consumer sustainability labels could lead to inconsistencies and consumer confusion.
Despite these calls for reform, the investment industry has pushed back, arguing that disclosure requirements could disrupt markets. Chris Cummings, chief executive of the Investment Association, expressed concerns about the impact on the industry, suggesting that a significant portion of ESG funds may not meet new regulatory standards, potentially leading to consumer disillusionment.