The bear market is hitting ESG funds, too

According to Bloomberg, U.S. ESG stocks collectively have declined 16% so far this year—faring better than the 22% sell-off in the S&P 500 and escaping the 20% threshold for bear territory. But several leading ESG funds and indexes have plunged deeper into the red.

Blackrock’s iShares MSCI USA ESG Select ETF (SUSA) is down 24.92% year to date. Morgan Stanley’s sustainability-themed Global Opportunities Portfolio has slumped 43.67% since January. Vanguard’s U.S. ESG ETF (ESGV) has lost 26.3% of its value in the same time.

In part, ESG funds are sliding because of their exposure to tech stocks, which are generally seen as acceptable high-return investments when compared to fossil fuels, thanks to the former’s ready acceptance of renewable energy.

But ESG funds are also facing a reckoning, spurred by several high-profile “greenwashing” allegations and the Securities and Exchange Commission’s proposals for tightening standards on ESG disclosure.

Last month, German police raided the headquarters of Deutsche Bank on suspicion that the bank’s investment arm had made fraudulent claims about its ESG portfolios—an accusation Deutsche has denied. Last week, the Wall Street Journal reported the SEC is investigating Goldman Sachs for greenwashing ESG funds, too. The bank declined to comment on the report. 

Average investors appear to have grown increasingly skeptical of the value—monetary and moral—touted by ESG funds as well. Several years of substantial capital inflows helped bulk the ESG market up to a multi-trillion dollar market, capturing $50 billion worth of net new investments in 2020, and $70 billion in 2021.

But now money is leaking out of the market. According to Morningstar, investment into ESG funds globally declined by 36% in the first quarter of the year—the worst decline since the pandemic began.

Yet, advocates maintain that proper ESG funds will ultimately win out over the long term, and that the shakedown in greenwashing will only make the market more robust. 

“I think we’re seeing a change in the momentum, a shift in the growth rate. But I think when we look through the bull market cycle, we will continue to see more money move in this way,” Matt Patsky, chief executive of Trillium Asset Management, said during the Australian Financial Review ESG Summit on Wednesday.

Maybe. Though as governments worldwide set more environmental standards for all companies to abide by as part of the transition to net-zero, the notion of an “ESG portfolio” could become even less distinct from the general market than it is now.

Eamon Barrett
[email protected]
@eamonbarrett88

CARBON COPY

BP goes green

British oil giant BP is taking a leading 40% stake in a $30 billion green hydrogen project in Australia. The so-called Asian Renewable Energy Hub is the largest hydrogen project proposal to date, covering an area larger than Delaware. When it’s complete, the project hopes to produce 1.6 million tonnes of hydrogen a year, starting from 2027. For comparison, the EU has pledged to produce 10 million tonnes and import another 10 million tonnes annually by 2030 to help replace fossil fuels. WSJ

Summer in Greece

Greece’s first ever climate crisis minister, Christos Stylianides, is preparing for his first summer in the new role after winning the appointment in September. Last summer, wildfires ravaged the country as temperatures hit record highs. The government has set aside $159 million to furnish fire fighting aircraft and maintain woodlands this year—eight times higher than previous years. The country will deploy 500 firefighter commandos into its forests, and beef up its fleet of planes to 86 from 74. But Greece is also piloting a new EU firefighter-sharing initiative, recruiting 250 fighters from across six countries to help tackle any blazes. FT

Yen, yuan, crash

Barclays bank has published an estimate of how severely climate change could decimate currency markets, predicting a worst case scenario in which the Japanese yen and the Chinese yuan plummet over 50% by 2070 if carbon emissions continue pretty much unabated. The U.S. And Australian dollars as well as the Euro perform relatively well under the bank’s model, while Japan is swamped by rising sea levels and China is smothered by pollution. It’s a dire scenario, but Barclays notes that markets have only priced in an “optimistic view of the future,” anticipating a 2C rise in global temperatures. Bloomberg

Hail and floods

Extreme weather events are rocking North America. On Sunday, Mexico City suffered a freak hail storm that left parts of the city buried in slush and reportedly caused a supermarket roof to cave in. On Tuesday, Yellowstone National Park officials ordered over 10,000 visitors to evacuate as heavy snowmelt and sudden rainfall caused the Yellowstone river to burst its banks, unleashing a torrent of floodwater throughout the nature reserve. Houses, bridges, and roads were swept away by the raging river. AP

IN CASE YOU MISSED IT

Yes, carbon offsets are imperfect—but we need them by Sam Gill

Africa is now the global leader in hydrogen energy, with even tiny Mauritania outproducing the U.S. Here’s why investors are so bullish by Bernhard Warner

Why this Israeli billionaire spent 17 days growing chickpeas and steak in space by Shoshanna Solomon

You may be stuck paying high gas prices for years as a global metals shortage sabotages the electric car revolution by Tristan Bove

Carmakers plead for Europe to postpone a 2035 ban of gas-powered cars less than a day after it’s announced by Christiaan Hetzner

Plastic is now falling from the skies in the most remote place on earth by Sophie Mellor

CLOSING NUMBER

7 years

In the last seven years, China has reduced the same share of air pollution as the U.S. Has cut in three decades. According to the University of Chicago, China reduced pollution 40% from 2013 to 2020, while the U.S. Achieved a 44% reduction from 1970 to 2020. China remains the world’s largest carbon emitter but, university researchers say, average pollution levels globally would have increased since 2013 if not for China’s cut backs.