Anthony Rowley

Macroscope | ESG investing: a waste of climate finance?

Trillions invested in environmental, social and governance initiatives has diverted funds away from more worthy sustainable projects

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A worker stands in the yard of a coal-fired power station in Winfield, West Virginia, in July 2018. There is an urgent need to replace coal- and oil-fired power generation with renewables or nuclear energy, and to finance the vast transition costs involved. Photo: Bloomberg

Anthony Rowley

Published: 4:30pm, 15 Jun 2024

Many people seem turned off by the subject of climate change and yet, as investors, they have collectively poured huge sums into fighting the phenomenon. I wonder if they would be happy to learn that much of this money may be going to waste.

Environmental, social and governance (ESG) investing became a solution for global warming and associated climate change until a reaction set in against it. Now, that reaction is turning into a retreat.

The Financial Times reported that a net US$40 billion has been withdrawn from ESG equity funds so far in 2024, according to research from Barclays, marking the first year in which such flows have turned negative.

“Global investors are turning their backs on sustainably focused stock funds as poor performance, scandals and attacks from US Republicans hit enthusiasm for a much-hyped sector that has pulled in trillions of dollars of assets,” the FT report said.

ESG is not so much an investment bubble as a mirage, one so powerful that, by the end of 2022, global ESG assets had exceeded US$30 trillion and were projected to reach more than US$40 trillion by 2030, according to a Bloomberg Intelligence report at the beginning of this year. Withdrawals to date may not look so large against that, but the tide of opinion has seemingly turned.

While other countries such as China have approached the problem of global warming with practical solutions like mass producing relatively cheap solar panels for export to the rest of the world and others have sought institutional solutions, major Western economies have seemed to place a high priority on ESG – a purely financial construct.