Is an ESG bubble about to burst? (2021)
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| • What is ESG? • Enacted ESG legislation • Arguments for and against ESG • Opposition to ESG • Federal ESG rules • Economy and Society: Ballotpedia's weekly ESG newsletter |
Twice in the past several weeks, heads of large financial institutes warned that ESG would create—or, in one case, already has created—significant investment bubbles. On Thursday, October 21, the president of the Institute of International Finance urged caution:
| " | Speaking during a panel at CNBC’s Sustainable Future Forum on Thursday, Adams said it was inevitable that the current drive toward ESG (environmental, social and governance) would create assets that exceeded their fundamental value.
“There’s always bubbles, it’s a lesson of history. Anyone who thinks we won’t have it is naïve,” he said. “In times of great technological or economic transformation there’s disruption, there’s bubbles, we see it in the crypto markets now. We saw in the internet throughout the 1990s that all popped in March of 2000. And the weak firms were washed out and new firms rose like a phoenix. Yes, there’s going to be bubbles — there’s too much money chasing too few deals.” Having appropriate policies and a resilient financial system in place when the bubble pops, Adams added, would allow investment into promising firms in the space to continue.[1] |
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Meanwhile, the Swiss Finance Institute of Finance released a report making the case that ESG, as an investment segment, is already a bubble and could pop:
| " | The doing-well-by-doing-good conviction driving ESG investors around the world is nothing more than an illusion of their own making, according to a controversial new study.
Research from the Swiss Finance Institute argues stocks highly rated on environmental, social and governance metrics have outperformed in recent years all thanks to the trillions of dollars flooding the sector. The fundamentals of socially responsible investing have played no role in driving these returns. In fact, ESG bets would have backfired spectacularly without this influx of cash -- leaving Wall Street portfolios at the mercy of volatile capital flows. “Under the absence of flow-driven price pressure, the aggregate ESG industry would have strongly underperformed the market from 2016 to 2021,” Philippe van der Beck said in the “Flow-Driven ESG Returns” paper published this month. “If however, ESG inflows unexpectedly revert, the realized future return may be strongly negative.”… To the researcher, the point is that flows have so far driven industry performance -- more than commonly acknowledged. Just as retail traders were able to power seemingly deadbeat companies to dizzying highs this year from GameStop Corp. to AMC Entertainment Holdings Inc., prices of stocks bought by ESG investors will naturally rise -- even without any fundamental justification.[1] |
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See also
- Environmental, social, and corporate governance (ESG)
- Economy and Society: Ballotpedia's ESG newsletter
External links
Footnotes
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