Bottom Line Leaders are thinking hard as other companies look to distance themselves from politics.
Firms that manage investment funds are being reorganized or in some cases closed exchange traded funds (ETFs) previously associated with environmental, social and governance (ESG) objectives amid political and regulatory backlash.
ESG investing has grown in prominence over the past decade as well ESG themed funds are becoming more accessible, with leading financial institutions offering ETFs and other investment products aimed at promoting ESG-compliant business policies and practices.
However, the last few years have seen a growing trend against ESG investing. Regulators have refused to be green-burned by companies exaggerating the sustainability of their operations and funds that failed to comply with their investment criteria. Several states have cut ties with asset managers regarding their ESG practices, particularly to oppose fossil fuel production, while ESG’s focus on shareholder returns has alienated other investors.
“About four years ago, it was something that was advertised from the fund company until now [registered advisers] and financial institutions are talking about the ESG offerings they had, and now I don’t hear it being marketed at all except maybe from financial planning firms that target clients who want to invest specifically in ESG,” Jim Crider, CEO of Intentional. Living FP, told the -FOX Business.
BLACKROCK’S SUPPORT FOR ESG DECISIONS DOWN TO RECORD
ESG investing prioritizes the environmental, social and governance principles of companies. (Yuki Iwamura/Bloomberg via Getty Images/Getty Images)
Crider said that when ESG investments increased significantly during the pandemic, such funds were able to rise along with the broader market, which helped mask the imbalance in performance that would appear under other market conditions. After it rose during the 2020 market rally, the 2022 pullback in inflation it has led to a reassessment of the priorities of investors.
“Initially it was a green wash, a show of force and a rising tide that lifted all boats and led to the takeover,” Crider said. “And then the downside was the market pullback, the layoffs, the tightening of the fund combined with, ‘Hey, what’s really in this thing? I need to prioritize my investments, this thing doesn’t have the social impact I thought it would. It did, so it’s not accomplishing what I hoped it would do with that idea, and it’s not profitable per se, so I need to go back to something normal.’
TEXAS RAISES $8.5B FROM BLACKROCK IN STUNNING DRIVE TO ESG MOVEMENT
Investors and financial institutions have turned sour on ESG investments over the past few years. (Photo by Michael M. Santiago/Getty Images / Getty Images)
An ETF.com report citing data from Bloomberg Intelligence found that as of May 2024, at least 20 ESG ETFs were closed in the first half of this year after 23 ESG ETFs were closed last year.
Among the funds that closed in early 2024 were three ESG ETFs offered by WisdomTree Asset Management that were under heavy scrutiny. Securities and Exchange Commission (SEC).
The regulator reprimanded WisdomTree Asset Management over misstatements and failure to comply with regulations relating to three ETFs marketed as ESG despite investing in affiliates. petrol stationincluding coal and natural gas, and the sale of tobacco products. Among the issues noted was that the firm’s vetting process lacked policies and procedures for vetting companies like this one as the ETF is independent.
‘COST’ ESG STANDARDS, HEAVENLY POLICIES WILL FINALLY REDUCE FOOD AND ENERGY: REPORT
ESG investment funds often seek to avoid fossil fuel companies due to environmental concerns. (Photographer: Justin Merriman/Bloomberg via Getty Images / Getty Images)
The company filed for bankruptcy in January and the SEC order came down in October. WisdomTree agreed to a cease-and-desist and reprimand order and a $4 million civil penalty, though it neither admitted nor disputed the agency’s findings.
The ESG backlash has also prompted some fund managers to rename ETFs to avoid running afoul of the SEC’s renaming rule, which could land them in hot water if words like “ESG” or “progressive” are determined to be misleading.
“The ‘ESG’ and ‘sustainable’ tags are subject to heightened scrutiny and often appear outside of various regulatory bodies,” Jordan Rodriguez of Wernick Spear Wealth Managers, told FOX Business. “The risk and suffering of the above was well worth the marketing effort, but with the changing sentiments among investors and the general public, there is little, if any, benefit to managing those identities.”
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Investors are increasingly pulling funding from ESG and sustainable investment funds. Morningstar reported that in the second quarter of 2024, investors withdrew $4.7 billion from US sustainable investment funds, marking the seventh quarter in which sustainable funds experienced net outflows. That followed the largest outflow in the first quarter of nearly $9 billion.
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