Are ESG criteria condemned?

" ESG criteria are irretrievable! They are evidence of a situation where good intentions have overtaken common sense. May they rest in peace." A finance professor at the Stern School of Business at New York University, Aswath Damodaran does not mince his words when, for the Financial Times, he sketches a future for these famous partly environmental standards.

It is a fact that in the United States, the acronym covering the three words "Environment, social and governance" is suffering from growing unpopularity. Six U.S. states, including Florida, have already passed laws prohibiting their use for public fund investment or management decisions. And anti-ESG bills continue to multiply there.

"This complex and contrasting situation reflects the deep political and economic tensions in the United States. These standards are thus often perceived by their Republican detractors as an imposition of progressive values, contrary to their political convictions. And in some states, notably those heavily dependent on fossil fuel industries, ESG criteria are seen as a threat to the local economy," explains Elise Beaufils, deputy head of sustainability research at Lombard Odier IM.

"This complex and contrasting situation reflects the deep political and economic tensions in the United States," explains Elise Beaufils, deputy head of sustainability research at Lombard Odier IM

Across the Atlantic, public institutions are not the only ones wanting to distance themselves from these criteria. Larry Fink's dramatic U-turn in June 2023 is proof of that. A long-time defender of ESG standards, the head of BlackRock chose to stop using them, believing they had become the emblems of a form of political activism rather than those of a purely financial strategy.

Fund withdrawals

This investor cold shoulder is confirmed by the facts. According to a Barclays study published in June 2024, clients had withdrawn a net $40 billion from funds labeled ESG.

On the Allnews site, Eric Pedersen, a member of the responsible investment committee at Nordea Asset Management, puts things in perspective: "Many reports mentioned a supposed exodus of investors from ESG strategies last year, but they often do not reflect the whole truth. (...) Global assets of funds deemed 'sustainable' by Morningstar rose from $2,500 billion at the end of 2022 to nearly $3,000 billion at the end of last year."

Granted, given the $7,000 billion invested according to these criteria, "this exodus" appears insignificant. Except that it marks a first negative reversal of money flows.

The criticisms

What is wrong? Where does it hurt for an initiative that initially appeared to be a real step forward for the planet and capable of exciting the masses over the past decade? "The problem is that the words ESG represent a sort of Frankenstein's monster, a grouping of criteria that tells us less about the impact of a fund or a company than about society's confused sense of benevolence," reads the Financial Times.

" The problem is that the words ESG represent a sort of Frankenstein's monster," reads the Financial Times.

Another concern is that marketing has taken precedence over the ecological issue, allowing fund managers to "green" their files to attract investors. "The reality we must face today is that companies and markets have not brought about change at the required scale," says a recent study by a panel of researchers at the University of Cambridge.

Their conclusion is unequivocal: "ESG methods in favor of corporate sustainable development have no realistic chance of ensuring a safe future for humanity, nor even of protecting the companies, markets and economies on which they depend."

Global skepticism

While the criticisms are less virulent in Europe than in the United States and the adoption of ESG criteria there seems easier, reality is not entirely rosy. Earlier this year, the European Parliament and the Council had to intervene to try to restore some credibility to them. In February, a provisional agreement was reached to ensure greater transparency and public oversight of agencies in charge of environmental, social and governance (ESG) ratings.

Will that be enough? Not sure. Just ask actors on the ground to perceive the many existing reservations about ESG criteria.

"By wanting to put everything under one roof, trying to please as many people as possible, we now find ourselves with an indigestible catch-all and ultimately little representative of what truly effective criteria for protecting the environment should be. In short, ESG criteria are a vast sham where companies change nothing or implement ridiculous solutions like preserving an already existing forest," reacts Camille Lipani.

"ESG criteria are a vast sham where companies change nothing or implement ridiculous solutions like preserving an already existing forest," reacts Camille Lipani, a private adviser in sustainable investments.

A private adviser in sustainable investments, she specifies that these criteria are clearly not those she prioritizes for her clients. At least not in their current form. Like many, Camille Lipani calls for a complete overhaul of the formula, starting with a distinction between the three aspects: environmental, social and governance.

With or without ESG

Elise Beaufils believes that "the sole use of ESG metrics focused on corporate practices is gradually being superseded by more complex and finer analyses of the transition to a more sustainable economy." At Lombard Odier, there are currently about forty people tasked with better understanding these transition issues and their impact on the Geneva bank's portfolios.

Whether these criteria are ultimately revised or not, the good news is that the desire for change persists among both individuals and institutions. In corporate terms, carbon neutrality remains at the top of the list of goals to be achieved.

As for investors, the desire for more sustainable investments is still current. They should even continue to grow given that their profitability continues to improve. "To the great dismay of its detractors, these initial capital outflows do not mark the death of ESG as a concept, but may mark its decline as a marketing tool," concludes the FT.

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