Why So Many ESG Funds Are Failing (And What's Next)
It's not because of Trump.
ESG investing is in trouble—but the real reasons have nothing to do with the “war on woke capital.”
Yes, ESG has become a political punching bag. Nevertheless, this is not why these funds are failing.
Anti-ESG sentiment is indeed growing—Republican states pulling pension money, political attacks on “woke capitalism.”
Many firms have been backpedaling on ESG rhetoric. BlackRock, for example, just exited the NetZero coalition. Despite claims that this will not affect how they manage investments, the public has its doubts.
This is the reality though: ESG funds were struggling even before this political shift. It’s not due to trends at the surface but to sloppy fundamental methodologies.
What’s Actually Killing ESG Funds
The core problem is financial, not political.
ESG funds are poorly constructed: Many ESG ETFs are just slightly modified versions of the S&P 500—not real ESG plays.
ESG funds have a tendency to underperform in inflationary markets. They are often tech-heavy and weak on energy. As a result, they are sensitive to interest rates.
Greenwashing is rampant: ESG funds often include companies that don’t belong there.
Investors are losing trust: People are realizing ESG scores don’t correlate with actual impact. Funds that rely on scores are on their way out, no matter whether people support sustainability or not.
ESG investing is a structural problem, not just a political one. Based off scores and ad-hoc methodologies, it’s worth questioning whether they were ever a good idea.
These ESG Funds Are Still Working & Thriving
Not all ESG strategies are doomed. Some funds are still delivering strong returns. What sets them apart are more sophisticated ESG screening methodologies that go well beyond scores, better diversification, and better ESG data sources.
Comprehensive ESG screening methodologies also include a deepened understanding of how different ESG factors deliver financial returns. You heard that right: Financial returns and positive societal impact are possible simultaneously—no tradeoffs needed.
Modern ESG funds are also well-diversified and thus more suitable to inflationary conditions. This approach also mitigates sector-specific risks and aligns with broader market movements. The result are more robust and stable returns.
Advanced ESG data sources can be found in public disclosures as well as industry-wide surveys and alternative data sources such as news or opinions. Building the capacity to gather and process all this data takes some upfront investment in talent and infrastructure. Winning firms recognize that this is a necessary investment. After all, bad data leads to bad insights.
A good example is Impax Asset Management. Despite challenges in the ESG landscape, the fund has maintained its commitment to sustainable investing. Their strategy emphasizes achieving financial returns alongside societal benefits, which demonstrates their resilience and adaptability in a shifting market.
The Future of ESG Investing
ESG funds aren’t failing because of politics—they’re failing because they were flawed from the start.
Smart investors are already moving beyond the old ESG model. The next generation of ESG will look nothing like today’s funds.
On Thursday, I’ll break down how to actually invest sustainably—without falling into these common ESG traps.
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