In 2023, the global scale of ESG investment continued to grow, but the market was distinctly polarized.

From a regional perspective, Europe further strengthened its regulation to curb "greenwashing." In the United States, the anti-ESG tide rose higher, with capital outflows persisting for nearly seven quarters.

From a strategic viewpoint, the two mainstream strategies of negative screening and ESG integration, which were originally dominant, were affected by the recovery of oil and coal prices and the downward trend of clean energy indices, resulting in returns that underperformed the market, and their scale was shrinking. Aggressive investors were increasingly focusing on post-investment ESG management, and responsible management strategies were overtaking the curve.

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Behind the advance and retreat, there was a game between all parties in pursuing sustainable development and financial performance, long-term goals and short-term interests. Undoubtedly, the sustainability of sustainable investment itself requires a balance between the two.

As ESG development in China entered the fast lane, globally it was turbulent, with different regions diverging and the situation was as intense as ice and fire.

In the United States, which has become the main supplier of crude oil, the ESG investment market was chilly.

At the beginning of 2024, a Wall Street Journal reporter, Chip Cutter, said, "ESG has become the latest dirty word in the American business world," which went viral in the ESG circle.

In March 2024, JPMorgan Chase, Citibank, Wells Fargo, and Bank of America collectively withdrew from the "Equator Principles," an initiative advocating that financial institutions should conduct due diligence on environmental and social issues for project financing over $10 million. At the same time, State Street Bank and Pacific Investment Management Company also withdrew from the Climate Action 100+ initiative.

In Europe, the birthplace of the ESG concept, regulation and the market continued to heat up.

To curb "greenwashing" and standardize ESG disclosure, Europe advanced more than 20 ESG-related bills in 2023. Among them, the Sustainable Finance Disclosure Regulation (SFDR) classified funds in the market into three categories: funds that promote environmental or social factors (commonly known as "light green funds"); funds that aim at sustainable investment (commonly known as "dark green funds"); and ordinary funds that do not have any ESG factors as their main investment objectives. Funds that do not meet the standards must remove related terms from their names. Morningstar estimates that only 18% of the current $4 trillion "light green funds" meet the threshold.Despite the significant tightening of ESG fund standards and the reshaping of related investment portfolios, in the fourth quarter of 2023, amidst the first-ever quarterly net outflow of global sustainable funds, Europe still maintained a net inflow of $3.3 billion.

Europe leans to the left, while the United States leans to the right; behind the conflict lies an imbalance of interests.

The implementation of ESG is not without costs. For instance, regionally, the widespread adoption of clean energy can affect the income of oil and coal-producing regions; intergenerationally, the current generation must bear the cost of emission reductions for future generations. Therefore, as ESG practices deepen, some groups increasingly feel the impact on their own interests and begin to counteract. Radical supporters and opponents hold firm to their respective ends, taking action on the political and business stages.

At the crossroads, does ESG still have room for development globally? How can ESG practices be deepened to mitigate the interest conflicts among different groups?

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Negative and Positive Screening Strategies Face Challenges

ESG investment is an important lever for driving ESG development. ESG investment is like a coin, inevitably having two sides: one is strategically upholding the values of sustainable development to screen targets; the other is in terms of results, if positive returns cannot be achieved, investment is also difficult to sustain.

Therefore, when strategy and results are at odds, it is the most testing time for institutions to be steadfast in their ESG investment. In recent years, the divergent stock trends of fossil fuel and clean energy companies have brought about such a test.

The energy tension brought about by the cold winter of 2021 and the outbreak of the Russia-Ukraine conflict in 2022 led to increased energy demand and soaring prices for fossil fuels such as crude oil and coal, resulting in strong stock performance for companies. At the same time, clean energy companies need to purchase equipment through debt financing, and the Federal Reserve's continuous interest rate hikes have led to increased costs and eroded profits, causing stock prices to languish.Against this backdrop, the two major strategies in the ESG investment field have been affected and have begun to fall out of favor. Funds adopting the negative screening strategy, which exclude surging petroleum energy stocks, and funds adopting the integration strategy, which favor declining clean energy stocks, have both seen their performance impacted. According to research by CICC, the S&P index that employs a negative screening strategy and excludes fossil fuels had an excess return of -1.76% in 2022, underperforming the benchmark index.

Globally, the asset scale managed by funds using the negative screening strategy has long been at the top among various ESG strategies. This strategy requires the exclusion of companies or industries that have a negative impact on society and the environment from the investment portfolio, with the petroleum and tobacco industries being among them. Whether to invest in petroleum and energy companies has even become an important indicator to measure the ESG attributes of investors. Berkshire Hathaway, owned by Warren Buffett, has been criticized for not being "ESG enough" due to its continued purchase of Occidental Petroleum (OXY.N) stocks.

In the United States, the anti-ESG movement that began in 2018 has intensified, with one of the focal points being the negative screening strategy—opposing investment in the oil and gas industry, which does not align with the interests of states that rely on this industry as a pillar of their economy. Pension funds, the most important source of capital for ESG investments, have become a battleground. In recent years, institutions such as BlackRock, Credit Suisse, and UBS have been "blacklisted" by some pension funds in Texas and Florida. According to Plural data, 14 states in the United States have enacted legislation restricting pension funds from considering ESG factors, most of which are controlled by the Republican Party.

At the end of 2022, a new rule issued by the U.S. Department of Labor allowing pension fund managers to consider ESG factors in investment decisions was vetoed by the Senate on the grounds that it would harm pension returns. In March 2023, President Biden used his veto power for the first time since taking office to support this new rule, preventing the anti-ESG bill proposed by the Republican Party from being enacted.

The anti-ESG trend, combined with the recent surge in oil prices, has hit the negative screening strategy. Data from the Global Sustainable Finance Association (GSIA) shows that the proportion of fund assets using this strategy was as high as about 65% from 2016 to 2018, dropped to 43% at the beginning of 2020, and further decreased to 12.66% (excluding EU data) at the beginning of 2022.

At the same time, petroleum companies have gradually appeared among the heavy holdings of ESG funds. Data from Bank of America shows that at the end of 2021, the number of European ESG funds holding a significant position in Shell was almost zero, but half a year later, its asset scale proportion had reached 6%. According to statistics from the Research Department of CICC, as of July 2023, the proportion of fund assets holding Total Energies in global ESG funds has reached 11.59%.

Looking again at the main investment strategy in the ESG field at the beginning of 2020—the ESG integration strategy. This strategy incorporates ESG factors into traditional financial and valuation analysis for positive screening of targets.

New Fortune has analyzed MSCI's ESG ratings for A-share companies, and among the 446 top companies with rating results, the average level of companies in the military, steel, basic chemical, and petroleum and petrochemical industries is relatively low overall, which reduces the possibility of their inclusion in the constituent stocks of ESG-related funds. However, the stock prices of companies in these four industries from 2022 to 2023 have outperformed the average of the 446 companies.

At the same time, New Fortune has found that since 2020, Contemporary Amperex Technology Co. Limited (CATL), as a representative of clean energy stocks, has continuously been the top holding stock in domestic public mutual ESG-themed funds for nine consecutive quarters. However, after CATL's stock price reached a high of 692 yuan per share at the end of 2021, it had fallen to about 140 yuan per share by the end of 2023. The scale of 204 ESG-related thematic public mutual funds has also shrunk from 123.464 billion yuan at the end of 2022 to 83.357 billion yuan at the end of 2023.

In the United States, from the beginning of 2020 to the beginning of 2022, the investment scale of the two major strategies, ESG integration and negative screening, decreased by 15.36 trillion and 2.68 trillion US dollars, respectively. During the same period, the asset management scale of U.S. ESG investment institutions shrank significantly from 17.8 trillion to 8.4 trillion US dollars, directly leading to a global ESG asset management scale reduction of 5 trillion US dollars. Morningstar data shows that as of the fourth quarter of 2023, U.S. sustainable fund assets have experienced net outflows for seven consecutive quarters.Responsible Investment Strategies Gain Favor

While negative screening and ESG integration face setbacks, the responsible investment strategy (also known as "corporate engagement and shareholder advocacy strategy"), supported by some committed ESG investors, has thrived.

Data from the Global Sustainable Investment Alliance (GSIA) shows that by the beginning of 2022, the proportion of responsible investment strategy-related products globally, excluding the European Union (which was not included due to changes in the definition and methods of sustainable investment), has approached 40%.

The United States is no exception. Despite the decline in local ESG investment, the scale of responsible investment strategy products has expanded against the trend by $1 trillion, growing from $1.98 trillion at the beginning of 2020 to $2.98 trillion at the beginning of 2022.

Why has this strategy won the favor of investors?

According to the GSIA definition, the responsible investment strategy refers to investors using shareholder rights to participate in corporate governance and correct behaviors they believe violate relevant ESG criteria based on ESG standards. It is evident that active participation and proactive supervision by investors to enhance the ESG performance of invested companies is the core of this strategy. This aligns well with the positioning of ESG investment as "money with values."

Currently, from Europe and America to Japan, some large asset management companies use negative screening and ESG integration in the selection process and apply the responsible investment strategy in the post-investment management phase.

For example, Parnassus, the largest pure ESG mutual fund company in the United States, has a dedicated ESG responsible investment team. It reviews the ESG risk reports of all target companies at least once a year, and if it decides to divest, it completes the sale within six months. At the same time, Parnassus exercises shareholder rights by meeting with the management teams of invested companies, sending letters to management or the board of directors, and participating in industry responsible investment initiatives. If a company is unresponsive to its suggestions, Parnassus may督促 its improvement through submitting shareholder resolutions or proxy voting.BlackRock, the world's largest asset manager, holds an absolute advantage in the field of ESG investment in the United States. It has launched over 200 sustainable open-end funds and ETFs in the U.S. market, accounting for more than one-third of the total, and its sustainable investment scale approached $600 billion by the end of 2022. Its post-investment ESG management is primarily the responsibility of the investment management team BlackRock Investment Stewardship (BIS), adopting a method essentially consistent with Parnassus. It is reported that since 2020, it has helped 291 companies make progress in climate disclosure, and in the future, the resolutions of invested companies on climate change will continue to be a focus of its attention.

Neuberger Berman, which practices "active ESG investment," launched the proxy voting initiative (NB Votes) in 2020, aiming to focus on the companies with the largest shareholdings by its clients. By submitting shareholder proposals and voting for or against the proposals put forward by company management, it promotes the optimization of these companies' ESG performance.

Pictet, the largest ESG fund manager in Europe, on one hand, makes investment decisions based on corporate ESG performance and formulates corporate cooperation plans to improve their performance in areas such as climate change and water resource management in the E domain, food nutrition management in the S domain, and long-term corporate culture in the G domain. On the other hand, it actively exercises its voting rights and participates in corporate decision-making. According to ShareAction data, in 2022, Pictet supported 85% of the resolutions in the E domain and 90% of the resolutions in the S domain among the invested companies.

GISA data also shows that outside the European Union, Japanese investors have become the largest users of responsible investment strategies, with the scale of related products growing from $1.74 trillion to $3.74 trillion between 2020 and 2022. Sumitomo Mitsui, Japan's third-largest financial institution, uses this strategy to influence corporate behavior in three ways: exercising shareholder voting rights; engaging in dialogue with companies on ESG issues and taking appropriate actions to enhance company valuation; and encouraging companies to strengthen ESG-related disclosures.

In China, leading fund companies have also taken action. According to research by the United Nations Principles for Responsible Investment (UN PRI) on four contracted companies, Harvest Fund, E Fund, Southern Fund, and China AMC, they have implemented responsible investment strategies in areas such as climate change, animal health and environmental protection, responsible marketing, and corporate governance. Liu Xiaoyan, Chairman (Co-) and General Manager of E Fund, has repeatedly called on investment institutions to actively participate in the governance of listed companies after investment, improve the proxy voting mechanism, and maintain positive interaction with companies on ESG issues.

In addition to investment institutions, there are also some aggressive non-profit organizations that raise funds through membership fees and other means, buy shares of some companies, and thus, as small shareholders, influence company decisions.

Therefore, the popularity of responsible investment strategies has also put some investors in opposition to corporate management.

In 2021, Engine No.1, a hedge fund that spent $35 million to become a small shareholder of ExxonMobil, gained the support of shareholders such as BlackRock and secured a seat on the board of the oil giant, completing a "climate coup" and beginning to influence its energy transition decisions.Taking the previous case as a lesson, in January 2024, ExxonMobil sued two small shareholders who also adopted shareholder activism strategies and demanded that the company disclose climate-related targets.

So, what should be done when ESG goals conflict with the company's current business strategy?

The approach of Neuberger Berman may be worth referring to. It proposed that it would vote in support of proposals that could enhance the company's value in the long run and oppose proposals that seem valuable but ultimately have unclear goals or are not timely. At the same time, it focuses on negotiating with companies to fully understand the fundamentals of the company, discussing from both principle and whether it is reasonable for the company to make well-founded decisions.

For example, in 2023, shareholders held two opposing views on the investment and financing strategies of Canadian banks for the oil and gas industry, encouraging and canceling. Neuberger Berman believes that shareholders need to draw a clear line between encouraging banks to disclose better information and not improperly interfering in their daily operations. In fact, the relevant banks have extremely high transparency, and the responsibility of their executives is to decide on loan policies. From a tactical perspective, the banking industry was struggling with stricter regulations and operational challenges at the time, and it was not the right time to propose requirements that could distract the industry.

That is to say, for responsible investment strategies, while promoting their own values, investors also need to pay attention to timing and fundamental realities, without damaging the value of the company, in order to achieve both investment returns.

Although the imbalance of interests brings ESG noise, global sustainable funds have encountered a turning point since 2022, with net inflows far less than in 2021, but the growth trend continues. Morningstar data shows that the asset size of sustainable funds outside the United States at the beginning of 2022 still increased by 20.31% compared to 2020, among which the EU and Japan increased by 16.95% and 49.23%, reaching 14.05 trillion US dollars and 4.29 trillion US dollars, respectively.

In addition, China has also become a rising star in ESG investment. As of the third quarter of 2023, more than 67% of the asset size of sustainable funds in Asia outside of Japan came from China.

Overall, despite the pain and interference, the continuous inflow of funds is enough to prove that all parties involved in ESG investment can find consensus in the game and achieve sustainable development.