The great ESG fund cull of 2023 is upon us

In today’s edition:

— Behind the incredibly shrinking ESG fund market, some stars emerge

— What anti-ESG backlash? Consumers are shifting; investors are noticing

— Renewable energy topped coal usage in the U.S. for the first time in 2022. What’s next?

— How carbon-emitting concrete is suddenly becoming a climate solution

— Is nuclear power equal to renewable energy?

The makings of a thorough spring cleaning of ill-qualified European environmental, social and governance (ESG) funds is at hand, and it could be a bonanza for the few funds managers who crafted the most climate-focused portfolios.

Months after the European Union introduced a new concept that all funds labeled ESG must meet certain criteria under a rule called Article 9, the index giant MSCI is about to cull more than 90% of funds currently using ESG from its list of ESG funds, according to the Financial Times, citing an internal client memo from BlackRock.

The intention is to take out the vast majority of funds who may be greenwashing their marketing with environmental claims that don’t hold up. The result will be a rush of investor money into the few funds that are left, as managers with fiduciary requirements to follow ESG strategies upgrade to the new, smaller niche.

While the MSCI purge is expected to cover funds around the world, European funds will suffer the brunt of it, as they have been the most aggressive in using ESG in their marketing efforts in the past few years. As we wrote last year, fund managers adapting to the Article 9 rule have already seen huge inflows in recent months.

Among the funds ranked the highest for ESG under Article 9 by Physis Investments, three of the top five are index funds run by French asset manager Amundi. And the other two are run by Lyxor, which was bought by Amundi last year. Among the most popular among institutional investors have been Baillie Gifford Positive Change (BPEKX), Morgan Stanley Global Sustainable Equity, and Janus Henderson Global Sustainable Equity (JEUIX), and KBI’s Water Strategy portfolio, also part of the Amundi group, according to Investment Metric’s most recent institutional fund flow analysis.

Combined with the political pressure ESG investing is getting in the U.S., the MSCI purge may ring the final death knell for the short-lived ESG fad. Few investors will be sad to see those letters, which nobody can agree a meaning on, go the way of other fads. But the clearing up of strategic investing intentions will give environmentally-conscious investors better choices. And further integrate climate investing with fiduciary duty as a whole.

Callaway Climate Insights