Will Investors Hit the Pause Button on Sustainable Investing?

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News Analysis

Sustainable investing has turned into one of the biggest trends in the finance industry, representing 33 percent of total U.S. assets under management.

Although investing in assets managed with environmental, social, and governance (ESG) consideration has been primarily driven by institutional investors, money managers say the retail side has grown exponentially. Last year, investors parked more than $51 billion in net new money in ESG open-end and exchange-traded funds, which was the fifth consecutive annual record, Morningstar found.

With U.S. President Joe Biden proposing to spend significant sums of taxpayer dollars on climate change, and governments worldwide concentrating on the green economy, it had been anticipated that ESG funds would continue to accelerate. However, when energy demand is outpacing renewable supplies and traders are witnessing opportunities in non-renewable stocks, could ESG investing cool down until conditions normalize?

President Joe Biden looks at a wind turbine blade as he tours the National Renewable Energy Laboratory in Arvada, Colo., on Sept. 14, 2021. Brendan Smialowski/AFP via Getty Images

Greenwashing Concerns Hurt ESG Sector

Is ESG investing risky, or is it a maturing market ripe for long-term growth?

In August, Desiree Fixler, former head of sustainability at DWS, alleged that the asset management firm misrepresented its ESG investments in its annual report. This led to skeptics arguing that the socially responsible investment community might be greenwashing companies’ practices and not showcasing authentic ESG investment.

As some of the world’s largest financial institutions delve into ESG derivatives, Europe’s markets watchdog says it’s necessary to institute new measures to shield investors from greenwashing. The European Securities and Markets Authority (ESMA) recommended standardized criteria that organizations must adhere to before slapping ESG tags on investment products, including swaps and options.

ESMA regulators are also worried about potentially misleading terms, like “green hedge.”

“Similar to ‘ESG derivatives,’ new expressions such as ‘green hedge’ are primarily intended for marketing purposes without any legal meaning,” ESMA stated. “This contributes to investor confusion and greenwashing risks.”

A recent Schroders Institutional Investor Study found that 59 percent of surveyed institutional investors listed greenwashing as a substantial challenge when picking sustainable securities. When thousands of investment products are identified as sustainable, market analysts warn that it can become difficult for investors and management firms to ensure that companies adhere to ESG principles.

Still, investors’ ESG performance worries are subsiding, and bullish outlooks are improving.

“It is, of course, encouraging to see that investors’ long-held performance concerns about sustainable investing continue to subside,” Andy Howard, global head of sustainable investment at Schroders, said in a statement.

“We have argued for many years that investing sustainably with a strong focus on robust returns should not be mutually exclusive. Indeed, thoughtful and considered approaches to sustainability are at the heart of the objective of delivering long-term investment returns.”

Meanwhile, the rising number of ESG-related exchange-traded funds (ETF) may not be enough to generate significant change to a broad array of issues, noted VanEck CEO Jan van Eck in a recent interview with CNBC.

“ESG is good as a coherent investment approach on a fund-by-fund basis to make a difference and it’s good signaling, but to put it in perspective, it’s not going to change the end result of where we need to be,” he said.

“There’s more supply right now than demand, but the future looks great, we think, for ESG-related products,” Todd Rosenbluth, CFRA’s senior director of ETF and mutual fund research, told the business news network. “We think we’re going to see more of these products.”

Demand might be the key term. When there is another boom unfolding in more conventional assets, traders could be temporarily returning to these opportunities for growth.

Better Gains in Fossil Fuels?

Non-renewable energy is booming to start the fourth quarter of 2021. West Texas Intermediate and Brent crude oil futures are trading above $80 a barrel. Natural gas prices are around $5 per million British thermal units (BTU). Gasoline and heating oil are at their best levels in seven years. Coal, experiencing a notable bounceback, is at an all-time high. These prices have sent many stocks, such as Exxon Mobil Corporation, Suncor Energy, and Cheniere Energy, higher this year.

Advanced economies that have relied on alternative sources, such as wind and solar, are transitioning back to traditional energy options. When motorists are putting gas in their automobiles or heating their home, “you'll probably forget about what ESG means,” Ted Oakley, founder of Oxbow Advisors, told NTD Business.

Oakley, who thinks oil is potentially heading to $100 by next year, thinks the timeline of shifting from fossil to green doesn’t make sense. This could be exacerbating the deteriorating energy situation in Europe that he believes will catch up to the United States.

Ed Yardeni, president of Yardeni Research, agrees, stating in recent research that the world is facing a “paradox” on this front.

“The paradox of our human condition is that we may be at risk from more frequent and more catastrophic natural disasters if we don’t address climate change more quickly, but we could also freeze in the dark if renewable energy sources fail while the traditional fossil sources are becoming scarcer and extremely costly just when we most need them,” he wrote. “Governments pushing for a rapid transition are likely to get lots of pushback from their citizens if the lights go out too often and utility bills soar.”

Yardeni also forecasts that stocks not focused on ESG guidelines will rally and potentially do better than one of the leading benchmark indexes.

“The bottom line is that investors who aren’t constrained by ESG mandates are likely to overweight energy stocks in their portfolios, and those stocks are likely to outperform the S&P 500 for the foreseeable future,” he wrote.

Will Investment Dollars Do the Talking?

According to PwC’s June 2021 Global Consumer Insights Pulse Survey, more people are voting with their money. The study found that, for example, 51 percent of Americans and 71 percent of Chinese purchase from companies that are conscious of protecting the environment. In addition, a June CFA Institute study found that 69 percent of retail traders are interested in ESG opportunities, while 10 percent actually invest in these areas.

In this environment, where scarcity concerns intensify and there is, once again, considerable potential profit to be earned in oil and gas, what will socially conscious investors choose to do?