How ESG Investors Are Whipsawed by Shifting Standards

Over the past decade, ESG investment funds have become a wildly popular corner of finance. Money poured in even though there was little oversight to determine which funds could fairly claim that they focused on environmental factors, social issues or questions of corporate governance. Now there’s a vigorous shakeout. Around the world, regulators are writing — and revising — rules to govern these strategies. In Europe, that led some of the world’s biggest fund managers to strip the coveted top ESG tag from about €200 billion ($215 billion), or more than a third, of client funds from July 2022 through March this year. In the US, where the term is embroiled in partisan politics, the pool of assets carrying the ESG tag has, by one measure, shrunk by more than half over the past two years as definitions shifted. And questions around terminology remain unsettled, feeding accusations that ESG amounts to nothing more than “greenwashing.”

ESG marks a fundamental shift in the playbook for global capitalism. If done right, following this new set of standards would ensure that a company’s profits don’t come at the expense of clean air, human rights or honest management. As asset managers developed new financial products or repurposed old ones to incorporate ESG, the label was applied broadly to cover funds that, for example, shunned oil companies or met arcane, self-styled scoring systems or used buzzwords such as decarbonization without clear definitions. Some were sold as “sustainable” investments, an expansive term that’s often used interchangeably with ESG but, like ESG, still lacks a clear and consistent definition. Regulations for categorizing such investments and verifying their claims are now being fleshed out.