Is ESG (Environmental, Social, and corporate Governance) dying in the corporate and investing world?

Recently, there has been a fundamental misunderstanding of the purpose of ESG (Environmental, Social, and Corporate Governance) and what it represents, this misunderstanding reflected by the recent politicization of the term. ESG scores for companies are challenging, and bringing together the three different analytical pillars (environmental, social, and governance) into a single meaningful score is perceived as nearly impossible.

Certain industries, particularly carbon-intensive ones like oil, mining, and machine materials, have become adept at manipulating reporting metrics. They write their own narratives into methodologies provided by various rating agencies, resulting in a low overall score. This crosscurrent analysis for each of the three pillars makes any one pillar useless.

ESG should be criticized for having poor metrics, making it difficult for investors to make informed decisions. I think that the polarized party issues in the US and the inherent problems in ESG metrics have contributed to a weariness in the space. Instances where ESG ratings, including those from his own company, produced results that lacked innate sense must also be highlighted, such as a fracker receiving an 'A+' on the environment while a company like Netflix received a 'D-' on the same criterion.

As of the final quarter of 2023, ESG (Environmental, Social, and Governance) investing is experiencing a decline in flows and assets under management, according to Robert Jenkins, the head of global research at Lipper. Jenkins asserts that the ESG concept is flawed and is opting to abandon both the concept and its associated measurements. He highlights a significant issue with ESG investing, stating that incorporating materiality within a metric in a qualitative manner is challenging. Essentially, when dealing with factors based on emotions or opinions, it becomes difficult to measure them accurately without specific and quantifiable details. Jenkins plans to shift towards a broader perspective on responsible investing, moving away from the limitations he sees in the ESG framework.

In the last quarter, ESG (Environmental, Social, and Governance) investing trends have shown a notable shift. Before the pandemic, there was steady, organic growth in ESG products, but the pandemic accelerated this trend as many firms rebranded products and entered the ESG space, leading to significant inflows. However, there is now a division in the US over ESG products, with some companies relabeling existing products, resulting in outflows. It's challenging to measure accurately, but this trend might be influencing the reported numbers. Additionally, it is essential to recognize that flat flows are observed not only in ESG funds but across the overall market this year. 

Despite this backdrop, there are indications that a shift is underway. Critics and industry leaders propose moving beyond the ESG terminology and embracing a more integrated approach to responsible investing, considering long-term factors inherent to business decisions. Potentially, the role of AI is a game-changer, which offers the ability to access and analyze vast amounts of data transparently, bringing renewed legitimacy to ESG frameworks.

In conclusion, while the current state of ESG may be undergoing reevaluation, the broader goals it seeks to address remain central to ongoing discussions and transformations in the corporate and investment landscape.