Environmental, social, governance – three words that have become so politically charged that funds are dropping the terms (jobs cuts and merging teams) amid capital outflows and declining demand. In this piece, we talk through some of the controversies surrounding ESG and highlight potential silver linings across the three pillars for risk mitigation and alpha generation.

THE SHIFT AWAY FROM ESG

The three-letter acronym has become politically loaded, with a growing anti-ESG movement in the US. The backlash has been particularly prevalent in regions with large fossil fuel industries due to fears that disinvestment will harm local economies. Republican politicians have voiced concerns and increased pressure on funds that memberships of climate groups and coalitions could be in breach of antitrust law or fiduciary duties, especially as ESG funds underperformed their more conventional peers in 2022.

While the politicisation of ESG hasn’t been as extensive across the Atlantic, the acronym is also facing challenges in the EU.