The current approach to sustainable investing is clearly not working as emissions reach new highs.
“We should stop pretending and just be honest. The acid test is actual emissions, are they falling or are they rising? And they’re rising. And that’s where the rubber hits the road”.
Chris Hohn, Financial Advisor, 5 May 2022.
Global greenhouse gas emissions (Gt CO2eq) by year.
Source: European Commission’s EDGAR Database
Momentarily higher returns are turning around as ESG hype recedes.
“We are going to the zone where the positive impact of the ESG buzz is coming to the end of its cycle. Soon we will be at the stage where the relationship between ESG and performance will be negative as it [logically] should be.”
Abraham Lioui, Professor of Finance, 6 July 2021 (Financial Times).
The excess returns of companies by their ESG ratings in 2002–2020, on the basis of Asset4 ratings.
Blue = Companies in the weakest 25% of ESG ratings
Red = Companies in the best 25% of ESG ratings
Yellow = Companies in the best 10% of ESG ratings
Source: Lioui, A. & Tarelli, A. (2022). Chasing the ESG factor. Journal of Banking and Finance, 2022.
High fund flows into sustainability-focused funds have reversed as the tide has turned.
Some funds launched in 2020-21 “probably went out a little too quickly [and] probably took advantage of some ESG marketing sentiment”.
Jamie Franco, Global Head of Sustainable Investments at asset manager TCW, 5 June 2024 (Financial Times)
Quarterly flows into publicly traded ESG funds.
Source: Wall Street Journal citing Morningstar, March 3, 2024.
Research supporting ESG’s positive financial impact has diminished as contrary evidence emerges.
“Claims of positive alpha in popular industry publications are not valid because the analysis underlying these claims is flawed.”
Felix Goltz, Research Director at Scientific Beta, 3 May 2021 (Financial Times).
Number of papers in top five finance journals showing link between ESG and corporate financials or investment returns is:
Source: Prof. Wei Jiang, Emory University
