Tech Stock Crash... ESG Investment Plummets After 1 Year [Climate Policy at a Crossroads③]

[Asia Economy Reporter Jeong Hyunjin] Amid evaluations that global climate change policies have reached a crossroads due to the impact of the Ukraine war and recession concerns, ESG (Environmental, Social, and Governance) investments, which had rapidly grown until last year, have sharply frozen this year. As the stock market continues to decline, technology companies, which were representative ESG investment targets, are facing difficulties, and with Green Washing scandals and political attacks within the United States, ESG investment has encountered obstacles.

According to Bloomberg News on the 19th (local time), the amount of funds invested in U.S. ESG ETFs (Exchange-Traded Funds) was recorded at $4.6 billion (approximately 6.3 trillion KRW) as of August 31 this year. The size of U.S. ESG ETFs increased more than threefold from $8.1 billion at the end of 2019 to $32.1 billion at the end of 2020, peaking at $36 billion at the end of last year. Even though this year's figure is based on eight months rather than the full year, considering the growth trend over the past two years, it is interpreted as a significant decrease.

Another figure indicating that the enthusiasm for ESG investment has greatly cooled was also released. Global research firm Morningstar reported that the monthly fund flow of sustainable funds, which represent ESG investments, recorded net outflows in April and May, marking the first two consecutive months of net outflows since the end of 2018.

The main reason ESG investments are struggling is largely due to economic factors such as recession concerns. A foreign media outlet evaluated, "Due to interest rate hikes and recession fears, a bear market began this year, putting ESG investments on the test for the first time." Bloomberg assessed that as the stock market froze, technology stocks, which make up a large portion of ESG portfolios, plummeted, and energy stocks such as oil companies, excluded from ESG investment targets due to the Ukraine war, emerged as winners. Bloomberg explained that while the overall ETF returns were about 9%, the returns of 166 ESG funds registered in the U.S. were only 3%.

[Image source=Reuters Yonhap News]

Additionally, the occurrence of Green Washing scandals, called disguised eco-friendly policies, and increasing pressure from regulatory authorities on ESG investments are also dealing blows to investments. As the definition of ESG remains ambiguous and cases of exploiting it as a profit-seeking tool continue to occur, voices calling for regulations to prevent 'pseudo-ESG' are persistently rising. The U.S. Securities and Exchange Commission (SEC) publicly introduced rules in May to prevent Green Washing issues in ESG funds, and Europe is also reviewing and implementing measures to prevent investors from being misled by false ESG-related claims.

ESG investment has now emerged as a political issue following economic concerns. The U.S. Republican Party is targeting ESG investments with attacks against the Biden administration, which leads global climate change policies, escalating it into a political issue. Texas, led by the Republican Party, declared on the 24th of last month that it would exclude 10 financial firms, including BlackRock, from the state's pension fund investment targets. The reason cited is that these financial firms emphasize ESG and discriminate against the fossil fuel industry.

Earlier, West Virginia also excluded five financial companies, including BlackRock, JP Morgan, and Goldman Sachs, from state-supervised industries in June. The New York Times (NYT) reported earlier last month that the Republican Party is countering the Biden administration by 'weaponizing' government power and public funds.

Ben Johnson, Morningstar's head of client asset management, told Bloomberg that whether ESG inflows return to last year's peak level depends on whether risk appetite returns and whether the economy improves.

◆Terminology Explanation

Green Washing = Refers to 'disguised environmentalism,' which packages something as eco-friendly when it is not actually environmentally friendly.

This content was produced with the assistance of AI translation services.