ESG investment battles recede as geopolitics take center stage

Has investor passion for ESG been replaced by concerns over geopolitical tension? Or has fatigue simply set in?

The torrent of battles over environmental, social and governance investing that captivated the financial industry last year seems to have slowed to a trickle since the war in Gaza broke out last October. While there has been some noteworthy action on the ESG front this year, including US fund giants withdrawing from Climate Action 100+ and the state of Texas pulling billions from BlackRock in response to its contradictory positions on the fossil fuel industry, the number of client phone calls regarding the topic has steadily diminished, some advisors say.

Christopher Davis, partner at Hudson Value Partners, says he's hearing a lot less about ESG from his clients than he did a few years ago. He’s not pressing the subject, either, saying that “it means too many different things to different investors to be useful.

“We think ESG from the approach of exclusion is flawed,” Davis said. “Good governance is a must for any long-term investment and something more straightforward for us to evaluate. Many companies stand to benefit from the trends of electrification and on/friend-shoring, which each bring environmental and social benefits, but we think it may be more profitable to be aligned with the future than to seek ideological purity for its own sake.”

Matthew Chancey, certified financial planner with Tax Alpha, says his clients are inquiring about ESG less than ever.

“They sometimes think that certain companies in the ESG space are doing better financially than they really are due to the optics of press releases and media coverage,” he said. “That’s because clients rarely dig into the underlying economic fundamentals or companies, sectors or asset classes.”

Not that the topic has totally disappeared. Roshan Weeramantry, partner and co-head of wealth management at Helium Advisors says he is seeing the level of interest in impact investing or ESG increasing, particularly when it comes to climate change solutions.

“There are some very compelling strategies out there,” said Weeramantry. “We are seeing great opportunities to earn strong returns and invest in companies that are doing great things for the world. To us, that’s a no-brainer.”

Weeramantry adds that ESG and impact investing have captured the attention of some of the most sophisticated investors in the world: those who understand the power of mobilizing private capital to help solve some of the world's biggest social and economic challenges.

“JP Morgan Global Research reports that impact investments are expected to constitute 5 percent to 10 percent of investor portfolios within 10 years. Regardless of the political landscape, we believe the outlook for investments that earn a strong return while investing in companies that are doing good for the world is very promising,” he said.

Michelle Dunstan, chief responsibility officer at Janus Henderson, agrees that climate transition is still proving to be a growth area for investment even though the spotlight has come off the ESG world somewhat. And she sees new areas emerging as well.

“It's no longer the old way of saying, ‘I just don't want to look at all these bad things.’ It's about making that difference, improving things,” Dunstan said. “New and emerging areas include areas like biodiversity, deforestation, circular economy. We're looking at new and exciting ways to invest in all these areas.”