ESG Investing Revolution: Unveiling the Future of Wall Street

The ESG investing market is fundamentally flawed.

The numbers tell the story. Investment inflows into US ESG funds have been stagnant or slightly down since Q1 2022, as per exclusive data provided to CNN by Lipper, a financial data provider. In the US, the total value of assets managed in ESG funds dropped from $339 billion in Q2 to $315 billion by the end of September.

"Entering the final quarter of 2023, ESG investing remains characterized by decreasing flows and assets under management," stated Robert Jenkins, the head of global research at Lipper. Jenkins expressed his belief that the ESG concept is ineffective and stated that he will now shift his focus towards a more comprehensive approach to responsible investing (more details below)."

Jenkins explained the challenge of ESG investing, stating that incorporating materiality into a metric qualitatively is problematic. Essentially, when discussing subjective aspects such as emotions or opinions, it becomes challenging to measure them accurately without specific and tangible information. Before the Bell interviewed Jenkins to gain insights into the future of ESG investing both in the United States and on a global scale.

(This interview has been edited for length and clarity.)

Before the Bell: You say youre finally done with ESG and retiring the concept. Why?

Robert Jenkins has always been eager to witness the conclusion of that particular term, as he believes it to be dreadful. Anyone who has delved into the intricacies of calculating authentic ESG scores for companies understands the sheer difficulty of amalgamating three distinct analytical aspects into a single score that truly reflects the company's overall state.

Oil companies are adept at conforming to our comprehensive metrics. Notably, industries with high carbon emissions, such as oil, mining, and machine materials, are the most active in providing reports, and they skillfully incorporate their own narrative into the methodologies used by different providers. They are also proficient in balancing their disclosures across the three pillars to achieve a favorable overall score. Consequently, this results in a conflicting analysis for each pillar, rendering any individual pillar completely meaningless.

The concept behind each of the pillars remains significant, and I am a strong advocate for this area. However, it has become somewhat monotonous in the United States, and I believe much of this is due to bipartisan issues. Additionally, ESG itself has faced some challenges, particularly regarding its inadequate metrics for evaluation.

We witnessed ratings from different organizations, including our own, that lacked logical coherence. It is illogical when a fracking company receives an A+ in terms of environmental impact while a company like Netflix receives a D-.

Will ESG make a comeback in a fresh form? I believe it will. The advent of artificial intelligence has greatly benefited ESG, thanks to its ability to access and analyze vast amounts of data. By integrating the tremendous computational power of AI models to effectively process all this data with transparency, ESG can regain its reputation and credibility.

What trends did you observe in terms of ESG investing during the previous quarter? Prior to the pandemic, there was a gradual and organic increase in the popularity of ESG products. However, with the onset of the pandemic, there was a significant surge in interest, leading to widespread adoption. Firms began rebranding their offerings and incorporating them into the ESG sector, resulting in a noticeable influx of investments.

There is considerable disagreement regarding ESG products in the US, with many people rebranding identical products that appear to be experiencing a decline in popularity.

While it is challenging to quantify, I suspect that this factor may be reflected in our numbers. However, it is essential to acknowledge that the entire market has experienced stagnant flows this year, not solely ESG funds.

Have rising geopolitical tensions and oil prices affected investments in ESG funds? The Ukraine conflict appears to have played a significant role in shaping opinions. While anti-ESG sentiment had been brewing within the US throughout 2021, it had largely remained concealed. However, the outbreak of the war in Ukraine prompted individuals to rethink investing in defense companies and weapons manufacturers. Additionally, concerns surrounding energy and oil supplies were brought to the forefront. Ultimately, the Ukraine conflict served as the catalyst that tipped the scales.

Geopolitically, the investment community has reached an understanding regarding these wars, particularly in terms of their economic impacts as well as the ongoing developments within the oil and gas industry and weapons manufacturers. Thus, we have gradually come to comprehend these dynamics to some extent. However, should these conflicts escalate, it is anticipated that a significant shift will occur, with investors moving away from any ESG-themed products and seeking refuge in safer options.

Israels war with Hamas comes to corporate America

Many companies have refrained from getting involved in the ongoing Israeli-Palestinian conflict. However, my colleague Elliott Gotkine reports that staying quiet became impossible when the magnitude of Hamas' brutal attacks on Israel on October 7th was revealed.

According to Jeffrey Sonnenfeld, a professor at the Yale School of Management, remaining silent can be seen as an act of cowardice. He believes that companies cannot truly celebrate their corporate identity and values if they choose to stay silent on important issues.

Many companies have shown their support for Israel in light of recent events. Satya Nadella, the CEO of Microsoft, expressed his heartbreak over the terrorist attacks in Israel. Sundar Pichai, the CEO of Google, also expressed deep sadness. Disney donated $2 million for humanitarian relief in Israel, and several banks have made significant contributions as well. Around 80 well-known American companies have openly condemned the Hamas attacks, as tracked by Sonnenfeld who maintains a list.

Several organizations, particularly those outside of the United States, have chosen to adopt a more cautious strategy. In the United Kingdom, Tottenham Hotspur Football Club, known for its Jewish fans, expressed its dismay and grief over the intensifying conflict in Israel and Gaza.

According to Lior Susan, the founding partner of venture capital firm Eclipse, staying hidden or remaining ambiguous are not feasible approaches.

"Susan, a former member of the Israeli special forces, emphasized to CNN that not taking a position is, in fact, taking a position. She stressed the importance of companies demonstrating moral clarity and leadership during the Israel-Hamas conflict."

Richard Griffiths, the managing director of London-based strategic communications consultancy Citigate Dewe Rogerson, echoed this sentiment. He observed that the Russian attacks on Ukraine have heightened the expectation for companies to take a stand and speak out when necessary."

United Auto Workers president to striking workers: Theres more to be won

United Auto Workers union President, Shawn Fain, informed members that despite receiving record contracts from all three automakers, the union intends to prolong the strike in order to secure more favorable agreements. During a recent Facebook Live negotiation update, Fain stated, "After carefully assessing the offers presented by the companies, it is the collective belief of the vice presidents, as well as your national negotiators and myself, that there are still further gains to be made."

On Friday, my colleagues Chris Isidore and Vanessa Yurkevich reported that GM has disclosed the specifics of their latest proposal to the UAW. The offer incorporates an instantaneous 10% salary hike and an additional 13 percentage points of pay raises throughout the duration of a contract until early 2028. This amount exceeds the previous offer made by GM.