CNN) — ESG investing — evaluating companies using environmental, social and governance factors — was one of the most-cited phrases in earnings calls during the first half of the year. But a looming recession, tanking stock markets and the race to US midterm elections have put those sustainability efforts on the chopping block.
What's happening: The rapid pandemic-era uptick in ESG fund investing has now stopped completely, according to Refinitiv analysis provided exclusively to CNN Business. ESG funds in September saw their largest outflow of investor cash since the March 2020 recession.
These ESG and responsible investing funds saw assets under management peak above $8.5 trillion in late 2021. Now, they stand under $7 trillion, according to new data from Refinitiv Lipper provided exclusively to Before the Bell.
The ESG world has been ravaged by ongoing debates about the merits of sustainable investing, the challenge of determining what counts as an ESG-friendly company and the evolution of global regulations. These headwinds, combined with a gloomy economic outlook, have created a less-than-appealing environment for ESG-related funds.
Pushback from all sides: US politicians on both sides of the aisle and business leaders have accused companies of "greenwashing" their financial statements to make themselves look more environmentally friendly than they really are. Firms like asset manager DWS and Goldman Sachs have been accused recently of using the ESG label undeservedly.
In May, Elon Musk called ESG a "Scam" on Twitter after Tesla was removed from an S&P ESG index while Exxon, which has a long history of causing environmental damage, remained. That's because ESG ratings agencies tend to rate companies against others within their industry, so oil and gas companies are rated separately from automotive companies. They might rate an oil driller very highly relative to peers, but a renewable energy company may rate poorly compared to its own.
These counterintuitive results have added to a growing movement on the political right in the United States to divest entirely from asset management firms that invest and vote with ESG values in mind. Elected officials in red states have objected to the "values" they claim these funds promote, claiming that they're not necessarily representative of their constituents.
A large number of Republican-led states, 20 and counting, have said they will remove ESG-focused firms like BlackRock from managing assets in their state retirement plans. BlackRock has so far lost more than a billion dollars in commitments because of these changes, according to Robert Jenkins, head of Lipper Research at Refinitiv.
A debate over how to regulate ESG funds is also adding to the noisy picture. Standardizing ESG criteria will reduce investor confusion, say experts, but the current fight to do so is actually making things more confusing. More than 1,000 ESG-related regulations have been issued for the global investment industry alone, according to an analysis by Principles for Responsible Investment, a United Nations-supported group that promotes ESG issues.
The US Securities and Exchange Commission most recently required funds labeled as ESG to invest at least 80% of assets in accordance with the funds stated ESG objectives, which is a step in the right direction, according to Jenkins.
Executives at a red light: The future doesn't look great. US companies are preparing for recession by reconsidering their approach, according to a new KPMG poll. A third of CEOs in the US said they've already paused or reconsidered ESG initiatives, while another 59% say they'll reconsider their efforts soon, the annual survey found. Even so, 70% of respondents said they've seen ESG programs improve the financial performance of their companies.
What it means: Climate change could cost the US $2 trillion a year by 2100, according to the White House, and corporations and governments will have to make drastic changes to prevent even higher monetary and human costs. But the hurdles facing ESG investing show that doing so is easier said than done.
Big banks respond to customers' inflation woes
Inflation has people living paycheck to paycheck and now some banks are responding. This week, JPMorgan Chase, America's largest bank, became the latest financial institution to offer customers early access to their direct deposits.
Chase announced that its 1.4 million secure banking customers will automatically receive access to certain direct deposits — such as paychecks, tax refunds, government benefits and pensions — up to two days earlier, reports my colleague Alicia Wallace.
Chase joins a growing list of fintechs and traditional financial institutions — including Chime, Current, Capital One and Wells Fargo — to offer customers early access to their money. Also, in the past year, several banks such as Bank of America, Citi and Chase have started scrapping overdraft fees, which have come under fire from Democrats.
Services such as early access to direct deposits and waiving of overdraft fees come at a time when historically high inflation is draining consumers' excess savings, said Mark Hamrick, chief economist for Bankrate.
"At a time when prices have been high on a continuing basis, that has robbed consumers of purchasing power," he said. "It means that every dollar that is in the bank is increasingly precious."
The bottom line: Early access to direct deposits is another way for big banks to compete with fintechs like Chime and Current in the emerging war for customer relationships.
Last year, JPMorgan Chase CEO Jamie Dimon promised that the bank would keep pace with its emerging fintech rivals. "We will spend whatever we have to spend to compete with all these folks in our space," Dimon said during an earnings call.
More trouble at the Fed
James Bullard, the president of the Federal Reserve Bank of St. Louis and a voting Fed policymaker, spoke directly about monetary policy at an off-the-record, invitation-only forum held by Citigroup last Friday.
A transcript of the event, which was released by the St. Louis Fed only after the New York Times reported on the story, shows that Bullard discussed market reaction to Fed news as well as his view that another three-quarter-point rate increase could be appropriate at the December Fed meeting.
Critics say that a Fed official sharing new information with large banks and their clients is an ethical violation and lowers the public credibility of the Fed. Some are even calling for his resignation.
"Jim Bullard is one of the Fed officials that is making a decision about rate hikes that have effects in the United States, will have effects for US workers, and they are having effects around the globe, said Claudia Sahm, Senior Fellow at the Jain Family Institute and a former Federal Reserve economist, on Bloomberg Friday morning. " The idea that he gave any kind of private remarks to investors is outrageous, and he should go."
The St. Louis Fed said Thursday that it will "think differently" in the future following criticisms about Bullard's appearance, according to Bloomberg.
Third-quarter earnings from Hyundai, Philips and Discover.
Coming later this week:
▸ Conference Board Consumer Confidence, September new home sales and pending home sales, US GDP, September Personal Consumption Expenditure (PCE) Price Index.
▸ Third quarter earnings from Microsoft, Alphabet, Coca-Cola, Meta, Apple, Amazon, McDonald's, Exxon Mobil and Chevron.
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