Who decides what ESG is and how to make investments greener - new research

• US conservatives claim that ESG has an overly large impact on corporations and the whole economy – hence recent moves to ban the strategy for government investments.
• But critics in Europe argue that ESG funds are not doing enough to have a positive impact in the real world.
• Most ESG funds take conventional mutual funds as their baseline and tweak their capital allocation according to ESG criteria.
• Our market analysis of ESG funds showed that, out of all index-tracking ESG funds, 88% are broad ESG funds.

Who really sets ESG standards?

• There are many but, for example, the S&P 500 represents the US stock market, while the MSCI ESG Leaders USA Index supposedly represents the leading US companies with respect to ESG criteria.
• Further, most ESG funds are based on the ESG ratings of companies, which do not seek to measure a corporation’s sustainability impact on the environment or society.
• Broad ESG investing based on MSCI and other rating and index providers is therefore really only a risk management tool for investors.
• This means that broad ESG funds, which constitute the lion’s share of the market, often only make a rather feeble attempt to manage ESG.

How ESG funds could boost sustainability

• Capital allocation is only one of the potential ways ESG investing can boost sustainability, however.
• This should include clear criteria for broad ESG funds to dictate how capital allocation should deviate from conventional funds, plus favourable taxation or regulatory arrangements to boost the market share of light and dark green funds.
• The volume of “true” ESG funds is still so small that they cannot possibly change contemporary capitalism, indicating the US conservatives’ “war” on ESG is just electioneering.