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The ESG Review: ESG is losing its sparkle - now real value can shine through

In a seminal piece this week, the Wall Street Journal was the latest major news source to outline why it thinks Wall Street’s ESG craze is fading.

That choice of words feels important. The article badged ESG as a “craze”, suggesting it has become overheated got carried away with itself, but also that the underlying premise of “sustainable investing” remains, and that while politics, investor agendas and rough market conditions have made it fade, there is no suggestion that it will be erased from the map.

It summarises that Wall Street “is quietly closing funds or scrubbing their names after disappointing returns that have investors cashing out billions”. Again like any craze, it is now going out with a bang, but is falling out of favour.

The piece points the finger at the onset of regulatory oversight (which was always going to happen), higher interest rates that have suppressed sustainability-focused stocks (ESG investing is about far more than those though and a backlash the political crossfire over sustainable investing (which was always going to cause distraction).

What it isn’t, in any way, is a piece that suggests the world’s largest investors will return to the days that came before ESG rose to prominence, and that deriving value from ‘doing business better’ should be abandoned.

If you don’t have a WSJ subscription, Financial News has handily carried the piece here. It cites that “investors withdrew more than $14bn from sustainable funds this year, leaving them with $299bn”. Which means that of all funds - rightly, wrongly, or somewhere in the middle-ly - labelled sustainable, around 5% was withdrawn this year; a year that has been tumultuous, seen interest rates and inflation that many people have not witnessed in their lifetimes, with wars ongoing and political heat increasing.

All of that before we even get to the question of whether regulators and standards bodies need to get a better grip on the wild west of ESG investing, and what priorities large companies now place on delivering broader value to all stakeholders.

In summary, things are not nearly as bad as a few stark recent headlines would imply. The hype is rescinding, and a reality check is setting in. For the long-term, this is surely a good thing, and you don’t have to look far to see evidence that the underlying shift which ESG has flown the flag for is continuing.

Deutsche Bank this week reaffirmed its commitment to a sustainable transition.

Euromoney reported on how Artificial Intelligence can accelerate clear ESG reporting, but also springs new regulatory challenges.

CNBC covered why Social factors can be the toughest to understand, but hold the greatest potential for driving investors returns.

And of course, the utter debacle surrounding the firing, board shenanigans and eventual rehiring of OpenAI’s CEO put Governance - and its value - in the public spotlight for all the wrong reasons.

The sparkle has dimmed from ESG investing. It creates an opportunity for the true and lasting value of the underlying change it represents to start shining through.

The ESG News Review is written by Steve Earl, a Partner at PR agency BOLDT.

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