The demand for environmentally conscious investing is on a constant rise. Global ESG funds have generated around $45.7 billion inflows in the first quarter only. Quoted from Bloomberg, the global ESG-driven assets have sought at least $40 trillion globally. The pandemic is noted to have brought a significant jump in the number.
Upon the jump in demand for green and ESG investing, experts begin to question one thing: is this investing legit? Or is it another bubble that will pop soon?
ESG investing in the long run: a terror to the fossil fuel industry?
Investors who are into ESG investing automatically turn down companies that oppose ESG criteria. However, several companies can never be as “good” as the criteria expected. One perfect example is fuel fossil industry.
Companies in the fossil fuel industry have gone through numerous attempts to reduce the harm they give to mother nature. S&P 500 tried to combine ESG and created SPYX, a fossil fuel reserves free ETF. Shell also recently announced its target to cut emission. The company has laid off thousands of its employees to achieve the target.
Despite all the measures taken, it is still comparably difficult for such a “bad” company to pass the ESG criteria. Hence, it is not a reach to say the surge in ESG investing may come as a threat to “bad” companies, especially the fossil fuel industry.
The blurry line that separates “good” and “bad” companies
Following the previous argument, more problems emerge. ESG investing has long received criticism for its blur definition of “good” and “bad” companies. ESG rating differs from one agency and another. Each agency also weighs the three aspects: environmental, social, and governance into different portions. Until a clear cut separating both entities exists, the bad companies will still be in the lower hand.
ESG Investing in real-life practice
Amidst all the fuss, experts have now started to doubt the effectivity the investment to the environment. The Bank for International Settlements, also known as the central bank for central banks, noted that no significant change in carbon emissions is seen through green bonds. Any change that green bonds make, is by far, very minimum.
The doubt upon ESG investing grows larger as more uncertainties surface. Will ESG investing persist, or will it pop like other bubbles?