Reports of ESG’s demise may be exaggerated—but they’re not entirely unfounded.
According to recent coverage in The Wall Street Journal, investors pulled $8.2 billion from sustainable funds in the first three quarters of 2023. One telling example: Hartford Funds added “sustainable” to the name of a core bond product in 2021 and drew $100 million in new capital. But after falling short of performance benchmarks, the firm dropped its ESG mandate in 2023 and reverted to a conventional investment strategy. At least five other funds did the same, while 32 sustainable funds closed altogether.
The market downturn hit climate-focused and thematic ESG products particularly hard. While even traditional funds faced redemptions in a high-rate environment, ESG bore the brunt of investor retreat.
As Ron Rice, vice president at Pacific Financial, put it: “We found that the demand for ESG investing, by financial professionals working with retirement-plan participants, was more limited than we anticipated.”
Politics have played a major role in ESG’s recent contraction. Florida, under Governor Ron DeSantis, pulled $2 billion in state assets from BlackRock, protesting the firm’s stance on ESG. Other Republican leaders, including U.S. Sen. Eric Schmitt, are actively working to remove ESG considerations from public investments. Their argument? ESG introduces political ideology into what should be purely fiduciary decisions.
Critics such as Elon Musk have gone further, calling ESG a “scam” designed to push a social agenda under the guise of responsible investing.
But ESG’s champions haven’t gone quiet. Shareholder activism around environmental and social issues is on the rise. Between 2021 and 2023, the number of shareholder proposals focused on climate, diversity, and ethics jumped by more than 50%. Much of this momentum stems from a coordinated post-2020 effort by nonprofits and asset managers to push climate and justice reforms through shareholder engagement.
So while ESG-labeled funds may be in retreat, the values behind them are still influencing corporate behavior—and shaping boardroom agendas.
ESG investing doesn’t exist in a vacuum. It’s part of a broader movement around Corporate Social Responsibility (CSR)—a framework that asks companies to consider the impact of their actions on people, planet, and society, not just profits.
Rooted in stakeholder theory, CSR suggests that businesses have obligations not only to shareholders, but also to employees, suppliers, customers, and communities. For corporate boards, that can create tension. They must weigh long-term social good against short-term shareholder returns.
That balancing act has drawn criticism. Some argue ESG distracts from core financial performance. Others see it as a politicized tool that risks diluting fiduciary responsibility. But many boards and investors have begun to see ESG and CSR not as burdens—but as risk management tools and expressions of long-term corporate values.
Rather than fading, ESG is evolving—and fragmenting.
As some firms distance themselves from ESG, values-driven capital is beginning to flow in new directions. One increasingly prominent path is Faith-Based Investing (FBI).
Faith-Based Investing uses Christian values as a guidepost for portfolio decisions. This includes screening out companies that don’t align with biblical ethics, engaging with companies as active shareholders, and investing in community-building and charitable causes.
At its core, FBI views wealth as stewardship. Investment becomes a tool not just for financial return, but for living out one’s responsibility to family, community, and God. It reframes fiduciary duty in moral as well as financial terms.
While ESG focuses on sustainability and governance, FBI adds a spiritual dimension—one that’s resonating with investors seeking purpose-aligned portfolios in a divided political and financial landscape.
The declaration that “ESG is dead” might be catchy, but it overlooks a deeper truth: values-based investing is here to stay. Even as ESG funds close or rebrand, the principles behind them—corporate accountability, environmental stewardship, social impact—are finding new expression.
Whether through shareholder advocacy, CSR reform, or faith-based investing, investors are continuing to use capital not just to seek profit, but to reflect values.
ESG may be changing, but it isn’t going away.
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References:
Shane Shifflett, Wall Street Journal, 11/19,2023, “Wall Street’s ESG Craze is Fading”