For the first time in decades, the growth of environmental, social and governance (ESG) investing is slowing. In 2000, ESG barely existed. In 2020, the Global Sustainable Investment Review estimated ESG assets at $35 trillion.
Manifested in documents like the U.N. Principles for Responsible Investment, ESG has been embraced by nearly all global asset management firms. And while ESG itself is heterogenous, it has become predominantly associated with politically progressive initiatives.
ESG managers have sought to influence corporations, real estate developers, state and national governments, and a host of other entities that touch the lives of almost every person on Earth. Most individual investors throughout ESG’s ascension had little awareness of the policies their investment managers were promoting on their behalf.
Over the last few years, however, an anti-ESG movement has taken shape. The political left has levied accusations of "greenwashing" – the idea that rather than legitimately leaning into climate and justice issues, ESG managers and companies are "faking" their dedication to gain a commercially helpful ESG rating. Other entities, such as researchers at the University of Chicago, state financial officers and attorneys general, have argued that ESG leads to poorer performance and higher costs, which violates fiduciary duty.
WHAT ESG INVESTING IS, AND WHY SOME POLITICIANS ARE AGAINST IT
And from the political right, vocal critics including conservative presidential candidates, legislators and pundits, embrace these fiduciary objections and argue that large asset management and financial services firms should not use investor capital to influence policy and push progressive agendas the average American doesn’t embrace and without their knowledge or consent.
As a result, the growth in ESG mandates has begun to slow. Inflows into ESG mandates declined 76% in 2022, with many funds losing assets. Large asset managers like BlackRock, SSgA and Vanguard have all announced changes to their proxy voting approaches.
The average American is now aware of ESG in a way that simply wasn’t true five years ago. Many are now arguing for a "back to neutral" approach – embracing the idea that investors should only worry about shareholder return, with no attention to the social impact of companies or investments.
While the growing awareness of ESG and the specific agendas it is pushing is a positive thing, it would be a mistake for investors to abandon the idea of incorporating values into their investments altogether.
ESG reintroduced the investing world to values-based or ethical investing, but the concept has existed for millennia. And while it might be wise to de-escalate some of the political battles now arising in publicly traded companies or to challenge the dominant ESG frameworks on grounds of ideology, sincerity and performance, completely abandoning values-based investing would be a mistake.
The idea that our financial lives – as individuals and institutions – should align with our most deeply held values is much older than the ESG movement, as old as civilization itself. The Hebrew Torah, dating back 5,000 years, offered guidance to believers about the proper ethical view of money, lending and investing. The Koran, the Christian Bible, the Hindu scriptures and the sacred texts of almost all faiths similarly address proper views of money and its use at length.
Some of the earliest "negative screens" for investments in modern society can be traced to Methodist minister John Wesley, who decried investing in alcohol, tobacco, or other "sinful" industries.
And the modern activist investing movement arguably traces its origins to the Episcopal Church. Allied with GM’s lone Black board member, a Baptist minister named Leon Sullivan, the church’s investment arm in 1971 introduced resolutions to end GM’s operations in apartheid South Africa. The church’s resolution failed but the social blowback and Sullivan’s continued advocacy ended up changing not only GM’s operations in South Africa, but the whole of corporate America’s approach via the so-called "Sullivan Principles."
ESG INVESTMENT RULE EMERGES AS TOP ‘WOKE’ TARGET FOR REPUBLICANS BATTLING BIDEN
The answer to the modern ESG movement is not the abandonment of values in investing – that would be impossible. Rather it’s a renewed dialogue about the options investors have to express their values through their investment capital, and a series of positive visions for the influence that capital can have on the world.
Faith-driven investing may offer just such an alternative. Muslim Shariah Investing, Biblically Responsible Investing, Michael Eisenberg’s "Covenantal Capitalism," and Christian Faith Driven Investing frameworks all seek to invest based on their respective faith. This often involves negative screens, as it did in Wesley’s day, but also manifests as positive engagement – advocating for companies to embrace policies that encourage human flourishing like chaplaincy and adoption benefits, for example, or mounting substantive efforts to fight human trafficking in supply chains.
Some of these values will overlap with those of ESG investors. Many won’t. These faith-based frameworks represent an understanding that capital, indeed, has influence, and that the privilege of wealth is complemented by a responsibility to use it well.
The faith driven investing space is currently small. Shariah finance is ascendant in certain markets. Explicitly Christian approaches, by my estimates, account for somewhere between $150 billion to $250 billion – small relative to the trillions in ESG. But the latest crisis of confidence in ESG frameworks may result in the emergence of a more diverse and vibrant set of options.
There’s perhaps no better source for such constructive frameworks than the faith traditions embraced by the vast majority of people in the world.
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All investing is impact investing. Every dollar we put to work has an impact, positive or negative. It's encouraging that people are waking up to and questioning the current dominant movement. But it would be a shame if in questioning the specific values of ESG, we abandoned the entire idea of values in investing.
People can and want to have a positive impact on the world through their financial capital. Those who believe conventional ESG is the wrong approach must do more than reject it – they must advance a constructive vision of marketplace flourishing to take its place.
