The Market Is Putting an End to the ESG Craze

Far too many free-market advocates seem to lack confidence in the correctness of their own positions. They detest financial institutions that invest myopically in environmental, social, and governance (ESG) projects and say such investments cannot compete in the market with traditionally minded investing. However, they nonetheless insist that regulatory intervention is necessary to combat ESG investing – limited government and property rights be damned.

This position appears particularly imprudent since markets have already begun dissuading funds managers from ideologically motivated investing strategies.

Terrence Keeley, chief investment officer of 1PointSix LLC, wrote in 2022 that “Over the past five years, global ESG funds have underperformed the broader market by more than 250 basis points per year, an average 6.3% return compared with a 8.9% return.” He added, “This means an investor who put $10,000 into an average global ESG fund in 2017 would have about $13,500 today, compared with $15,250 he would have earned if he had invested in the broader market.”

The Wall Street Journal (WSJ) noted that investors have withdrawn more than $14 billion from sustainable funds in 2023. Soon after “rush[ing] to embrace sustainable investing,” WSJ says, Wall Street “is quietly closing funds or scrubbing their names after disappointing returns that have investors cashing out billions.”

Besides Hartford Funds, which just announced a notable pivot from ESG, “At least five other funds also announced they would drop their ESG mandates this year, while another 32 sustainable funds will close,” WSJ reports.

Rising interest rates, supply-chain kinks, and regulatory challenges have stalled many clean-energy and other environmentalist projects. Further, many such projects exist only due to copious federal subsidies, without which they lack profitability. When these subsidies do not materialize quickly or inflation erodes their real value, green projects often founder.

The market’s awakening to the follies of woke investing should surprise nobody. Democrats’ desire to manifest an environmentalist industrial paradise cannot overcome the basic market forces that stand athwart them, yelling Stop. Even the most prolific subsidization cannot negate renewable energy’s erraticism, the towering financial and mineral expenses of electric vehicle (EV)-battery production, America’s dearth of electricity transmission lines, or myriad other technical and economic factors that inhibit the Green Industrial Revolution.

Wind farms’ development costs have spiked 40 percent since 2019. Notably, Danish energy company Orsted recently abandoned two wind farm projects off the New Jersey coast and booked $4 billion in impairments in 2023’s third quarter. Other would-be wind farmers have petitioned New York State for steep increases in power prices to keep their still nascent projects afloat.

Meanwhile, several auto companies have announced significant delays in EV manufacturing. Ford lost an average of $70,000 on each EV sold in 2022’s second quarter, and the company’s EV operations project $4.5 billion in total losses this year. Despite the federal government’s unwavering financial support, EV prices remain well above those of traditional models.

In economics, wishing does not making something so, and ESG-obsessed investing cannot survive without government support. Rather than targeting “woke capital” with anti-ESG (and anti-freedom) regulatory proposals, free marketeers should keep focused on excising green subsidies, ideologically driven investment regulation, and the disastrous disclosure regime now before the Securities and Exchange Commission.