The ESG finance has shown many signs of very strong market traction since the beginning of the year. And now, questions start to pop-up… “Is ESG overbought? Is it in bubble territory? “—these two relevant questions were asked as a reaction to the interesting publication of key investment themes by the Deutsche Bank Weath Management (centered on ESG). Several others have indeed been questioning the current ESG investment growth, sometimes assimilating ESG to another fad and market bubble, or pointing the role of greenwashing behind this suden rise.
So, let’s have a closer look at the situation.
A temporary fad?
Is ESG another fad? We really don’t think so: Sustainable Finance didn’t emerge last year. It has long been here, and is rooted, among others, in the pursuit of ethical investments by North-American religious congregations at the end of the 19th century. In 2018, Sustainable Finance (SRI) already represented $12 trillion AUM in the USA only.
Considering ESG investment a fad is thus being myopic, short-sighted. ESG is more like a tidal wave: a 30 centimeters-high wave in the open ocean, a century ago, and now becoming 30 meters high when approaching the shore.
Overbought? More probably “overexpected”…
Is it overbought ? Probably not: there is a strong demand, from both institutional and Retail investors, but there is clearly a risk of overexpectation: to date, the current ESG rating approaches and ESG funds selection processes cannot allow the AMs to provide neither the end investors with products matching their high-level of ESG impact expectations, nor the regulators with the required regulatory reporting of impact.
So, there will be an increasing risk to disappoint the end-investors regarding the ESG performance, when they will ask to know what is the real impact of their investments. Regarding the financial return, ESG funds have mostly indeed outperformed, and consequently attracting more financial flows, but when it comes to Sustainable Investments, the main expected return should be the ESG performance.
ESG bubble ? Greenwashing might led to it
Increasing levels of greenwashing might indeed artificially inflate an ESG bubble. Due to the lack of standardization, and control, self-proclaimed Green funds are easy to market, and sell, thank to high levels of demand, such as currently on Green Bonds.
At the same time, little information is provided on the impact performance, and being a signatory of, e.g., the PRI, is quite often good-enough to be considered a responsible investor—unfortunately, good-intention are not enough, and it has now been demonstrated that, e.g., PRI-signatories AMs do not improve their ESG performance…
As money is poured into questionable “Responsible Investments”, the risk of greenwashing and artifical bubble is growing, along with the expectations… There is still time to adjust: yes, measuring the true impact might be hard, but it is not only possible, it is mandatory. Sustainable Finance and its credibitlity are at stake.