ESG Honestly

Posted 21 March 2024

ESG: No such thing as bad press?

ESG investing provokes some strong reactions, to put it lightly. A quick search for “ESG controversy” reveals more articles about why the style of investing itself is controversial than it does about investments which are controversial for ESG reasons. The backlash is most pronounced in the US, where Republican lawmakers have repeatedly tried to ban the managers of public investments from considering environmental, social or governance factors when making investment decisions.

In March of 2023, both houses of the US Congress voted to overturn President Biden’s decision to let pension fiduciaries take ESG considerations into account. Biden in turn vetoed the legislation, but Republican-controlled state legislatures have been fighting it in the courts ever since. On the American right-wing, ESG is considered the corporate version of “woke”. Former Republican presidential candidate Vivek Ramaswamy made fighting ESG investments a cornerstone of his campaign.

The situation is less politically charged on this side of the Atlantic. Few in Europe and the UK are explicitly against ESG investments’ purported goals, but there are still controversies. ESG criticism mostly centres on the effectiveness – or lack thereof – for helping goals like environmental sustainability. The notion of “greenwashing” – falsely advertising investments as eco-friendly – has garnered a lot of press, and new regulation has been introduced in response.

The effect on ESG investments

The impact on ESG investment products in recent years rebuts the old notion that there is ‘no such thing as bad press’. Reputational damage is undeniably bad for companies and their stock prices. Volkswagen lost more than 20% of its share value in the days after its 2014 diesel emissions scandal. And according to a 2023 report in the Journal of Cleaner Production, companies facing ESG scandals are likely to suffer from investment inefficiencies or external funding problems.

Negative stories about the broader ESG space weigh on the sector too. Last June, BlackRock CEO Larry Fink said he had stopped using the term ESG because it was now too politicised. The company’s ESG commitments were supposed to be unaffected by the terminology shift, but BlackRock has been rejecting more environmental and social shareholder proposals since. The Vanguard Group is doing the same, with reports last year that it only approved 2% of environmental and social resolutions, down from 12% in 2022.

A recent report from ESSEC Business School researchers showed that environmentally-focused funds usually take a significant hit from greenwashing scandals and political controversy around ESG. In the month following some bad press, institutional investors take an average of 8% out of green funds, while retail investors take out 12.6%.

An exaggerated problem?

Investors might pull out of scandal-ridden companies for financial as much as moral reasons. Volkswagen had to pay billions in fines across jurisdictions for the diesel scandal, and more recently, Deutsche Bank subsidiary was fined $19 million in the US for ESG reporting failures. But when investors pull out of the sector as a whole on the back of bad press, there is probably a fair amount of disillusionment at play.

Most ESG buyers are in the space because they want their investments to reflect their values. But stories about widespread greenwashing can make that goal feel a little hopeless. And when you combine that feeling with the polarised politics and stories about how ESG investing could lose you money, it is no surprise if investors start to feel that ESG has a zero or even negative affect.

However, that would be a big exaggeration. Plenty of research has shown that explicit ESG goals and clear implementation procedures tend to improve companies’ sustainability, and a proactive approach has been shown to make organisations more resilient to crises like climate change.

The real prevalence of greenwashing is a contentious issue, as is the way to solve it. But sometimes hidden in this critique is the suggestion that ESG investment should be abandoned or suppressed altogether, which is surely more contentious. For example, many of the legal challenges to ESG in the US have been brought by oil and gas companies, or lawmakers from fuel-producing states.

New regulation could help

In any case, new regulations on ESG reporting and implementations should help. Here in the UK, the new Sustainable Disclosure Requirements (SDR) make much clearer the sorts of investments which can count as environmentally friendly. The SDR replaces vaguer labels that did not distinguish between activist funds trying to implement green procedures and funds that simply screened off self-reported polluters, for example. The EU’s new labelling rules do something similar, making ESG investment assessments clearer and more consistent.

Neither are perfect, of course, but both at least aim for transparency and consistency. This helps funds and companies themselves, as they can know which procedures they should follow to qualify for ESG investment. And in time, it will hopefully help consumers by giving them the tools to check whether investments align with their own values, and the confidence to trust those tools work. Building that confidence will take time, but hopefully investors will see the worth in it.

Subscribe to the Tatton Weekly Email

Get the latest news from Tatton HQ directly into your inbox every week. Packed with industry insights, our weekly mailing will keep you informed on the latest news from Tatton and beyond.

You can unsubscribe at any time by clicking the link in the footer of our emails. For information about our privacy practices, please click here.

We use Mailchimp as our marketing platform. By clicking below to subscribe, you acknowledge that your information will be transferred to Mailchimp for processing. Learn more about Mailchimp’s privacy practices here.

Important notice:

The Tatton Weekly is provided for information purposes only and compiled from sources believed to be correct but cannot be guaranteed.  It should not be construed as an offer, or a solicitation of an offer, to buy or sell an investment or any related financial instruments. Any opinions, forecasts or estimates constitute a judgement as at the date of publication and do not necessarily reflect the views held throughout Tatton Investment Management Limited (Tatton). The Tatton Weekly has not been prepared in accordance with legal requirements designed to promote independent investment research. Retail investors should seek their own financial, tax, legal and regulatory advice regarding the appropriateness or otherwise of investing in any investment strategies and should understand that past performance is not a guide to future performance and the value of any investments may fall as well as rise and you may get back less than you invested.

Any reader of the Tatton Weekly should not use it as a guide or form the basis of a decision relating to the specific investment objectives, financial circumstances or particular needs of any recipient and it should not be regarded as a substitute for the exercise of investors' own judgement or the recommendations of a professional financial adviser. The data used in producing the Tatton Weekly is for your personal use and must not be reproduced or shared.

Please select all the ways you would like to hear from Tatton Investment Management: