- ESG funds saw outflows for the first time in their history last year, and the trend extended into this year.
- Alvarez & Marsal: we expect to see a decline in ESG-related campaigns and a renewed focus on metrics such as margin growth, cash generation and return on capital.
- The backlash against ESG investing overlooking physical reality is likely to continue for the foreseeable future.
Environmental, social and governance (ESG) investing has been touted as the mainstream investment style of the future—a more responsible but not less profitable future. The touting, however, went a bit too far, sparking an opposite and equal reaction, helped by the fact that ESG investing didn’t turn out to be as profitable as promised.
ESG funds saw outflows for the first time in their history last year, and the trend extended into this year. This was hardly surprising given the performance of most ESG industries out there, meaning wind and solar power. Somewhat ironically, European investors turned to defense stocks as an ESG investment, despite the industry’s negative impact on the environment. The argument made by governments promoting defense stocks is that defense manufacturers are positive in the social aspect.
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Yet the most contentious issue in ESG investing has always been the traditional energy industry, also known as oil and gas. The knee-jerk reaction of ESG advocates is that oil and gas have no place in an ESG fund or an ESG investment strategy. According to some, however, this complete denial of oil and gas was the single worst thing those advocates could do—for their own hopes and ambitions.
“There were all of these idiots that were just saying, if anyone is doing hydrocarbons, we’re going to blackball them from doing business or from receiving capital,” hedge fund veteran Kyle Bass told Bloomberg this week. Apparently not fond of mincing his words, Bass also said, “And so Texas lashed back and said, if you’re going to blackball someone that’s producing hydrocarbons, we’re not going to do business with you either.”