In a new development that promises to be significant in the world of sustainable finance, France has instituted new standards that restrict funds from incorporating ‘ESG’ in their fund labels unless they blacklist fossil fuel firms entirely.
At present, it is not uncommon for ESG funds to include fossil fuels within their portfolio given that some large oil and gas firms perform well under non-environmental ESG criteria, such as strong governance structures, positive social impact and diversity.
On the other hand, these firms have an undeniably negative impact on the environment, and senior policymakers have argued financial institutions need to stop funding new oil and gas projects to meet international climate goals.
This policy will likely cause large French financial institutions to move away from fossil fuel projects, and perhaps improve the reputation of ESG funds, which have suffered from accusations of hypocrisy from their continued support of oil and gas.
AI governance is quickly becoming a key concern for ESG investors as several governments, including the US, have sought to put controls in place to improve AI safety.
Stephanie Maier, Global Head of Sustainable and Impact investment at GAM investments wrote in ESG Investor that responsible investors, while acknowledging AI’s “staggering” potential impact “need to be more mindful than ever of the risks that exist and apply those considerations across their portfolios”
According to the FT, large asset managers have been wary of supporting shareholder resolutions that would force companies to disclose the potential impact of AI on their workforce. Currently, the largest labour union in the US, the AFL-CIO, is pushing for several shareholder resolutions that would force large companies to disclose how AI will affect production methods and jobs.
With voices urging greater concern for safety risks, it is quite possible that the responsible use of AI may become a core part of a company’s overall ESG performance.
A recent study from BlackRock found companies with greater gender-equality in the workplace outperformed peers by an average of 1.6% in return on assets (RoA), in the period between 2013 – 2022.
The study also highlights that companies led by a female CEO included in the MSCI World Index outperformed companies run by men by 1.0% over the 2014 – 2022 period.
Hedge funds owned or managed by women also produced 10.5% more than an average hedge fund over the past 16 years, and women-run startups have also delivered twice as much per dollar invested compared to those founded by men.
“Greater workforce diversity can boost economic output by tapping into underutilised talents and bringing different experiences and perspectives to the table”, says the report. Looking forward, the report highlights that investing in companies with women-friendly policies could yield better performance and returns.
Adding to already gloomy news regarding the performance of ESG and funds in 2023, new findings reveal that UK investors have withdrawn from them at a record rate this year.
According to the FT, ESG funds struggled to grow after the pandemic compared to others given that they avoided oil and gas companies that present strong environmental risks but surged amid the energy crisis. Some analysts have arguedt the cost of living crisis put extraordinary pressure on small retail investors, who withdrew almost £1.4bn from funds overall in September, impacting ESG funds particularly badly.
Some have also posited that the “anti-ESG” movement, prevalent in the US, may have come to the UK.