The ESG market is in upheaval after researchers at Morningstar recently stripped 1,200 funds of their ESG designations, and many major funds are suffering embarrassment over investments they had in Russia that are now coming to light. The coiner of the term, ESG, Paul Clements-Hunt has even called the ESG market “a whirligig, a frenzy, a marketing mania.” Bloomberg’s Saijel Kishan reports:
After attracting trillions of dollars, the ESG fund industry is headed for a “shakeout” over the next five years, according to the man who coined the acronym.
The finance sector has “sprinkled ESG fairy dust” on products that do little to account for environmental, social and governance risks, said Paul Clements-Hunt, adding that ESG funds in jeopardy include those that track benchmark indexes, some of which invested in Russia.
“Anybody who uses ESG, sustainability or green purely as a marketing device is really heading for trouble,” Clements-Hunt said in a telephone interview from Nairobi where he runs an advisory firm called Blended Capital Group. “You’ll see a developing queasiness from marketing departments where, perhaps, ESG funds aren’t all what they’re cracked up to be.”
The warning comes as Russia’s invasion of Ukraine exposes some of the dubious choices money managers selling ESG investments have made. Such funds held about $8.3 billion in Russian assets just before the war, including holdings in state-backed energy giants, as well as bonds sold by Vladimir Putin’s government, data compiled by Bloomberg show. That’s on top of a growing list of ESG products that hold oil, coal and weapons.
ESG has ballooned into an industry embraced by the giants of Wall Street and Europe’s financial hubs, with the label now slapped on everything from exchange-traded funds to loans and credit-default swaps. The global market adds up to about $40 trillion of assets, according to analysts at Bloomberg Intelligence.
“It’s a whirligig, a frenzy, a marketing mania,” Clements-Hunt said.
The 56-year-old said both institutional and individual investors no longer accept all ESG claims at face value. They’re “far more demanding, far more questioning of what is and what isn’t real,” he said.
Action Line: ESG funds put the political choices of fund managers ahead of their fiduciary duty to you. You want to invest with an advisor who acts as your fiduciary, and approaches your investments with the outlook of a Prudent Man. Instead of buying an ESG index fund where you have no control, focus on building a portfolio of individual stocks and bonds that meet your goals. If you need help building a portfolio of individual stocks and bonds, I would love to talk with you. If you would like to get to know me before we talk on the phone, there’s no better way than signing up for my free monthly Survive & Thrive letter. In the letter each month, I encourage and push you to achieve the personal and financial security goals you’ve set for your family. Click here to subscribe. We’ll get to know each other, and get serious about your future success.
