Dwindling ESG funds could signal lower rates of greenwashing Credit: Galeanu Mihai via Getty Images

Various environmental, social and governance (ESG)-related funds from Abrdn, Morgan Stanley and UBS have recently been renamed to omit sustainability-related phrases.

In addition, according to data from Morningstar Direct cited by the FT, launches of environmental, social and governance (ESG)-related funds have been steadily declining, with only six launched in the second half of 2023 compared to an average of nearly 100 a year between 2020 and 2022.

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The trend follows a ruling from the SEC in September 2023 that 80% of assets in funds must be related to the name.

“The hype around sustainable investing has been receding for a number of reasons,” commented Christopher Papadopoullos, senior analyst at GlobalData. “Investors have realized that funds labelled ‘green’ or ‘ESG’ are usually limited in their impact and stricter regulation has come in in Europe and the UK on what funds can label themselves as sustainable.”

Banking not taking climate change seriously

The fall in the number of ESG-named funds is reflective of a wider pattern.

GlobalData’s recent Banking Predictions Report highlighted that ESG has fallen and will continue to fall on banks’ lists of priorities since 2021. The report also pointed to growing disillusionment and cynicism across the industry about how seriously finance is taking climate change. It cited a poll that found 53% of respondents believe that ESG pledges are merely a marketing exercise for most companies.

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The levels of enthusiasm for ESG (and/or greenwashing) in 2021 have fallen. This is made clear through GlobalData’s filing analytics, which show a significant drop in mentions of the topic in 2023 compared to 2021 and 2022.

Any lack of true commitment to ESG is perhaps well exemplified by a Banking on Climate Chaos report stating that the 60 biggest banks in the world have contributed $4.6trn in lending, debt underwriting or equity issuance relating to fossil fuels since the Paris Agreement in 2016.

Greenwashing

Despite the falling interest in ESG, the SEC change should generate more transparency in the extent to which funds are invested in sustainable matters.

Papadopoullos highlighted that, in the last couple of years, there have been several high-profile greenwashing cases. In 2023 Deutsche Bank’s DWS paid $19m to settle greenwashing allegations by the SEC, while, in 2022, fines were handed out to both Goldman Sachs Asset Management and BNY Mellon over greenwashing.

“Over the long-term, the reduction in hype should help decarbonization as swathes of low-quality ESG funds face more scrutiny and exit the market,” said Papadopoullos. “More capital will instead be targeted at fund managers that can show their environmental impact and can direct capital to the most impactful projects and companies.”