Moneycontrol Pro Panorama | Waning of the ESG investing phenomenon 

While ESG funds in India may not have become a rage, they had become popular as domestic investors too latched on to the global trend.

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What seemed like an unstoppable force is not looking as powerful any more. Strangely, the forces that brought it to a position of power such as climate change and governance lapses have not gone away anywhere, and society too remains unequal as ever in many parts of the world. But investors are not buying it as they were earlier.

A recent Wall Street Journal news report said that The ESG Craze is Fading and that “the about-face comes after tightened regulatory oversight, higher interest rates that have slammed clean-energy stocks and a backlash that has made environmental, social and corporate-governance investing a political target”. Investors have withdrawn more than $14 billion from sustainable funds this year, according to Morningstar data, said the report, and the third quarter of 2023 was the first time that more sustainable funds liquidated or removed ESG criteria from their investment practices.

While events such as high interest rates can reverse and make sectors such as clean-energy attractive again, the backlash against ESG may not recede soon. While ESG funds in India may not have become a rage, they had become popular as domestic investors too latched on to the global trend. But in August, news reports had talked about how ESG funds were shedding AUM. It won’t be a surprise if this continues in line with global trends.

One of the main factors driving ESG funds’ acceptance among investors was that governments of various countries were putting their shoulders to the wheel for tackling environmental change. Developed countries and developing countries were coming together on a global stage and agreeing to steps that could hurt in the short run, in areas such as fossil fuel mitigation or emission controls, but in the long run lead to a much better outcome for the environment. The ultimate objective was to lower the pace of climate change.

Now, world leaders are still coming together and signing up for commitments, but action is falling short of expectations. Developed countries show no signs of giving developing countries the billions of dollars they have sought to put in place mitigation measures. The climate targets are so many years away and with no agreed upon annual milestones, there is only hope that that in the next 10 or 20 or 50 years that the climate will be in a better place than it is now.

Perhaps, the single largest reason that shifted the world’s focus is geopolitics. The Russia-Ukraine war shocked the rich world’s energy sector which sent household energy prices soaring. Faced with an angry population and renewable energy’s vulnerabilities, leaders moved back to fossil fuels. Even that ‘dirty fuel’ coal became an acceptable alternative. Faced with being booted out of power, governments decided climate change could take a backseat, even if for some time. Why, recently, even the UK announced a delay in a ban on diesel cars and also may backtrack on emission targets.

What this meant is investors suddenly found that investments in ESG sectors now face an uncertain future. If fossil fuels were going to be around for longer, the push for electric vehicles loses its edge. UK’s EV sector was disappointed by the government’s backtracking and so would its investors.

These events of the past few years have made developing countries wary of trusting the developed world’s talk on climate change. Even in India, the government has focused on growing the economy, providing it with enough access to energy (increase in coal-fired power, for example) and policies geared to create more investments and jobs. Domestic priorities are being given vocal priority.

In other words, investing is going back to basics, looking for the sectors with more potential and money-making opportunities for investors. When the going looked promising, investors decided to put the cart before the horse, and invested in the hope of a windfall when the policies became a reality. Companies too were doing their bit, making ESG a key part of their strategy and adding or even dropping products that were deemed to not fit with this theme. But they are also likely to re-examine these decisions, as policy changes.

Eventually, if governments put together policies with watertight commitments towards combating environmental change, then we can see ESG investing make a comeback. But a bigger shift could be if ESG practices become mainstream which then means all companies will be compliant. The theme itself will then become redundant. It will be back to good old investing basics to decide which companies or funds to invest in.

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