ESG investing is dying. That’s not a bad thing

By Nicole Goodkind, CNN

Environmental, social, and governance-focused funds, which were once deemed the darlings of Wall Street, may be on the way out.

They’re currently weathering a “perfect storm of negative sentiment,” said Robert Jenkins, head of global research at Lipper, a financial data provider.

Despite the gloomy forecast, Jenkins remains optimistic. He sees this as a natural phase of the market’s evolution. A new, more efficient system is taking shape that incorporates ESG standards into the bedrock of stock valuations, he said.

ESG investing as a separate entity could be on its way out, but the approach was wrong to begin with, said Jenkins. Instead, it should be integrated into the fundamental analysis of every investor.

What’s happening: Total assets under management in ESG funds fell by about $163.2 billion globally during the first quarter of 2023 from the year before, according to data shared exclusively with CNN by Lipper.

In March alone, total assets under management in the responsible investments fund market fell by $6.8 billion.

It’s not that the funds are underperforming, either. The average overall return for these funds was 2.2% in March — outperforming the 12-month moving average return for the wider market by 2.8 percentage points.

Instead, a confluence of political, geopolitical and market events has severely damaged interest in ESG investing.

Russia’s ongoing war in Ukraine forced traders to reconsider investing in energy and weapons stocks. Increased scrutiny also played into political differences around ESG investing and opened the door to vocal critics.

Because of a partisan divide, about half the states in the United States are enacting provisions to block efforts to invest in state-run investment accounts with an ESG lens, Lipper found.

Responsible investing funds also came up against mighty economic headwinds last year. These funds’ outsized investments in tech stocks and lack of energy stocks (which was the only positive sector in 2022), led to noticeable losses last year.

Things aren’t good.

Breaking the trend: “I think ESG was overly trendy and it got caught up in itself,” said Jenkins. “I was going to conferences two to three years ago, and I remember walking out and thinking ‘these guys aren’t saying anything new or different. They’re all saying the same thing.'”

Companies jumped on to the bandwagon and greenwashing, a marketing tactic to appear environmentally conscious in investments, became prevalent. That, in turn, hurt the movement’s reputation.

Jenkins sees what’s happening now as a winnowing of the responsible investing sphere. That’s all part of the maturation process, he said. “As data and disclosures move towards more standardization, ratings and analytics adjust for biases and become more transparent and aligned,” he said.

ESG won’t be as glamorous as it was before, but it won’t be a politically explosive term either.

“It’s actually going to fade a little bit from its marquee nature, it’s just going to be a part of sound business strategy and management,” said Jenkins. “They’re just going to be put alongside all the other fundamental analytics that we’re so used to hearing about, your earnings-per-share and your GAAP accounting. ESG ratings will just become part of that toolkit for investment managers.”

Can ChatGPT comprehend Fed speak?

The Federal Reserve has a language of its own filled with seemingly innocuous terms like “entrenched” or “data-dependent” or “gradual normalization” that actually hold enough power to turn the market on its head.

“Fed speak” refers to that purposefully ambiguous language used by officials at the central bank to communicate monetary policy decisions (in theory it’s used to avoid causing market volatility). Many reporters and analysts have made careers out of quickly deciphering that nuanced communication for investors and other interested parties.

But we may soon be out of work: A new research paper from Fed economists has found that ChatGPT and similar AI engines can do the job just fine. “The performance of GPT models surpasses that of other popular classification methods,” the paper found. “GPT models have the ability to explain why a certain sentence was labeled in a certain way” they found.

Humans remain at the helm for now — ChatGPT isn’t going to ask questions of Fed Chair Jerome Powell at his press conferences just yet. But, the Fed researchers wrote, these tools can be highly valuable “for assisting researchers and analysts in this domain.”

Mortgage rates rise again

Mortgage rates rose for the second week in a row, after easing inflation helped rates fall for five consecutive weeks prior to last week’s rise.

But that doesn’t mean that trend of increases will continue, reports my colleague Anna Bahney.

The 30-year fixed-rate mortgage averaged 6.4% in the week ending April 27, a slight increase from 6.4% the week before, Freddie Mac data show. The 30-year fixed-rate was 5.1% a year ago.

Despite the uptick, economists expect mortgage rates to decline this year as the rate of inflation decelerates.

Mortgage rates tend to track the yield on 10-year Treasury bonds. In other words, while the Federal Reserve doesn’t actually determine interest rates on mortgages, its rate hike decisions, investors’ reactions to them and Wall Street’s predictions of what could happen have an impact on mortgage rates.

The Fed is set to meet next week. Analysts expect the bank to raise rates by a quarter point and pause and even cut rates later this year.

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