Is ESG The Toxic Wordle In Asset Management?

In their recent article “It’s not just ‘woke.’ These are the most polarizing words in America,” the CEO of the Harris Poll and vice chair of Stagwell explain how certain words have become “like dog whistles” to hinder business. At the top of the list are “DEI” at 31 percent partisan split and “ESG” at 27 percent. They have even coined the new term “toxic wordle” to describe the most damaging current business words and phrases.

The cleverness of the toxic wordle phrase aside, there appears a softening of stances occurring around DEI and ESG in asset management since the Supreme Court’s June ’23 affirmative action ruling. And also great confusion around what is actually being discussed when terms like ESG or sustainability are used. In contrast to this industry ambiguity, below are four strong examples of concept and fact clarity around ESG and sustainability topics from Morningstar for asset management, ASC Advisors for hedge funds, Goldman Sachs for private markets, and Quality Shareholders Group for shareholder proposals.

Morningstar – Sustainable Investing Flows

Morningstar reports mediocre investment performance combined with political scrutiny in the US made 2023 the worst calendar year for sustainable investing since Morningstar started keeping track over ten years ago. Investors pulled over $13 billion from sustainable funds in 2023, with equity funds showing the worst underperformance. Demand for sustainable investing remains weak this year.

ASC Advisors – ESG & Hedge Funds

In their recent report, “ESG & The Top 50 Hedge Funds 2024,” ASC Advisors looked at what 2023’s top 50 hedge funds (based on With Intelligence Global Billion Dollar Club, September 2023) are reporting in terms of ESG and diversity on their websites and in their form ADVs. They observed some interesting trends. For example, hedge funds continue their strong focus on ESG, with 44 percent being signatories to the United Nations Principles for Responsible Investment (PRI), though this number is down slightly from 52 percent in 2022.

Goldman Sachs – Private Markets and Sustainable Investing

In their 2023 Private Markets Diagnostic Survey released last week, “Staying the Course in Private Markets,” Goldman Sachs surveyed over 200 limited partners (LPs) and general partners (GPs) across private market strategies in June/July of 2023 for their views on the alternative investment landscape. The report characterizes sustainability as “as focus, but more work to do.” Not surprisingly, sustainable investing is further adopted across the EMEA, but least embraced in the Americas, where 24 percent of LPs reported it was not a focus. Of note, most embracing sustainability consider it as a combination of financial and stakeholder focus. See chart below.

Quality Shareholders Group – Politicization of ESG Proposals

Lawrence Cunningham, founder of Quality Shareholders Group, reports support for “progressive social proposals” has fallen dramatically after record levels hit in 2022 and 2023. He suggests shareholders may be saying “enough” to politicization of business, after seeing proposal demands far surpassing what organizations such as the United Nations suggested in their PRI. One progressive example was a shareholder proposal asking the company to perform internal audits of civil rights. On the flip side, he further notes that most recently there have been a rising number of conservative proposals, also gaining little support.

A large challenge for businesses, particularly in politically charged times, is to say what they mean. Loose use of acronyms and labels only cloud clarity around actual concepts and intent. When there are so many definitions, businesses need to specify what they mean when they mention ESG or sustainability. To contrast with industry ambiguity, in this column we have mentioned four representative sources, all illustrating strong examples of concept and fact clarity around ESG and sustainability topics.