Is There Growing Tension in the ESG Investing Space?

ESG investing – which stands for Environmental, Social, and Governance – has been growing in popularity over the past several years. In 2021 alone, the market for ESG funds reached an all-time high, with an estimated $120 billion flowing into ESG-themed ETFs. A growing share of the investment community is interested in what MSCI defines as “consideration of environmental, social and governance factors alongside financial factors in the investment decision-making process.”¹

But not everyone is convinced.

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19 state Attorneys General, led by the Arizona AG Mark Brnovich, recently sent a letter to Blackrock requesting answers about whether the firm can actively pursue maximum shareholder returns while also balancing that objective with ESG advocacy. In 2022, for instance, traditional oil and gas companies in the Energy sector have widely outperformed the broad US equity indices, which raises the question of whether an allocation to renewable energy stocks, for instance, has been an optimal strategy.

The Attorneys General’s interest in this matter has largely to do with state pension funds, which invest hundreds of millions of dollars with firms like Blackrock. The AGs are questioning whether public pension funds are receiving the best possible returns, and also whether firms like Blackrock are using state employees’ assets to lobby firms against the use of fossil fuels, among other ESG considerations. Blackrock counters that they are acting in clients’ best interests, and that ESG advocacy and investment is a small piece of a comprehensive approach.

Readers can likely gather that this issue has become political, and our goal here is not to wade into the debate. At Zacks, our ESG investment options are available for clients who want them as part of their overall strategy, but we understand they are not for everyone. It is ultimately up to each client whether they want that type of customization in their portfolio.

Looking ahead over the next several years, we would argue there is a fairly strong case for having broad exposure to the energy sector, which would include both fossil fuels and renewables. Energy consumption will likely continue rising for decades, and though government regulation and stakeholder activism may influence how the landscape looks, market-based forces will ultimately determine the winners and losers.

From a pure “follow the money” standpoint, however, there is reason to believe that the burgeoning ESG trend is not just a passing fad. Some $130 trillion has been pledged by major financial institutions to finance the energy transition away from fossil fuels and towards renewables, with more likely to come.

There are other facets of ESG investing that are popular as well, like caring for the environment or having women in leadership roles, for instance. These are other elements of ESG that embody a certain set of values many investors want to align with. This is particularly true of younger generations of investors—according to a recent survey conducted by Morgan Stanley, 84% of millennials place emphasis on the importance of ESG ‘impact,’ and this is a demographic poised to substantially increase participation in the financial markets. According to the most recent U.S. Census, the 10 most common ages in the country are between 25 and 40, and younger generations tend – at least for now – to care more about social issues, sustainability, and issues with the environment. Younger generations are also going to drive long-term capital flows from here.

Bottom Line for Investors

It’s clear that the ESG category is rapidly gaining in popularity, particularly as governments, central banks, leaders, and citizens increasingly shift focus to climate and environmental matters. Tensions are likely to exist along the way, however, particularly as the values that tend to be associated with ESG investing are not shared by all investors. At Zacks, we leave the ESG decision in the hands of our clients – the choice of whether to participate or not is yours, and your portfolio can be customized to include or exclude the ESG category.

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¹ Wall Street Journal. August 30, 2022.

² Zacks Investment Management may amend or rescind the Revolutionize Your Retirement guide offer for any reason and at Zacks Investment Management’s discretion.

³ Zacks Investment Management may amend or rescind the Revolutionize Your Retirement guide offer for any reason and at Zacks Investment Management’s discretion.

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