Sizable decline in US ESG market leads global shrinkage

A decline in the U.S. market for ESG investing has resulted in an overall slide in the global market.

That’s according to the latest assessment by the Global Sustainable Investment Alliance, which provides updates on the size of the market every two years. The 2022 review, published Wednesday, shows that investors had $30.3 trillion in sustainable assets, down from $35.3 trillion in 2020.

In the U.S., investments in sustainable assets fell to $8.4 trillion last year from just over $17 trillion two years earlier, according to the GSIA report. The drop was attributed largely to a change in methodology used to calculate the numbers.

Still, questions about the future of sustainable finance persist in the U.S. as lawmakers from more than a dozen states, spanning Utah to Florida, try to fight the incorporation of environmental, social and governance principles into business and investing.

Maria Lettini, chief executive of the US Sustainable Investment Forum, said during a call about the GSIA findings that a “more robust methodology” in the latest report resulted in a headline number “that I think we can feel much more comfortable standing behind.”

Against a backdrop of skepticism toward ESG, Lettini said it’s “super important” for US SIF to “show leadership in this space and respond to the quite valid critiques that perhaps the total sustainable assets in the U.S. weren’t being assessed through a rigorous lens, which defines sustainability.”

In the rest of the world, ESG-related assets are still growing, according to GSIA. Sustainable investments rose more than 20% in Europe, Japan, Australia and New Zealand between 2020 and 2022, the alliance said. Overall, however, the breathless pace of the ESG boom that characterized the previous decade appears to be over.

“The industry is maturing,” James Alexander, chairman of GSIA, said during the call with journalists.

“We are taking a much more mature definition of what counts as sustainable now than we’ve done in the past,” he said. “We’re thinking more carefully about how do we avoid inadvertently perhaps greenwashing through the actions that we take.”

Interest in sustainable investing soared during the pandemic, when lockdowns caused energy prices to fall and buoyed portfolios that shunned fossil fuels. But when those lockdowns ended and economic activity came roaring back, the world order that followed proved difficult for many ESG strategies.  

The S&P Global Clean Energy Index has plunged 30% this year, as higher interest rates and supply-chain bottlenecks hammer wind and solar stocks. Bloomberg’s latest Markets Live Pulse survey shows investors expect the downturn to continue into 2024, with the negative sentiment extending to electric vehicle producers including Tesla Inc.

And the introduction of regulations across jurisdictions is forcing asset managers to justify ESG claims that previously went unchecked. There’s a “need for clearer definitions and a more shared understanding around what makes a sustainable asset ‘sustainable,’” GSIA said in its report.

The global investment industry is “at a critical juncture,” with the US facing its own “nuanced local financial market challenges,” Lettini said.

In its report, the GSIA said “the most common sustainable investment strategy globally is corporate engagement and shareholder action, followed by ESG integration then negative or exclusionary screening.”