The Dangerous Economist: The State of ESG Investing: How Dire Is It?

Investors have pulled billions, funds have closed and proxy voting is down. But proponents say the strategy remains viable, even if it’s pursued more quietly.

By Randall Smith of The WSJ.

Should businesses try to maximize profits or try to "do good" in the world? Is it possible for them to intentionally do good? Or is their job to maximize profits by seeking to satisfy customers? After the excerpts from Smith's article, I have links to many other of my posts on this topic plus some views from Adam Smith (who said the invisible hand would guide profit seekers to benefit society) and Milton Friedman.

Excerpts:

"Investing based on environmental, social and corporate-governance factors has taken a hit over the past several years amid a backlash against so-called woke policies and weakness in ESG funds’ performance."

"The pullback in ESG investing has been perhaps most visible in fund flows and performance. After tripling in size between 2018 and 2021, U.S. ESG mutual-fund assets have seen net investor selling since the spring of 2022, when the Russia-Ukraine war sent oil prices rising, hurting the returns of ESG funds that generally avoid fossil fuels.
The outflows alone took a big bite, totaling $65.7 billion since the second quarter of 2022, which equates to 20% of the funds’ average assets since then."
"U.S. ESG fund launches declined from a peak of 116 in 2021 to nine in 2025. A record 91 were closed."
"ESG funds’ recent underperformance due to many being underweighted in the small number of Magnificent Seven (Alphabet (Google), Amazon, Apple, Meta Platforms (Facebook), Nvidia and Tesla) and artificial-intelligence stocks that have driven market returns."
"Take BlackRock, one of the most influential supporters of ESG initiatives thanks to its broad ownership of public companies and the high profile of its CEO Larry Fink. Fink sent letters to CEOs calling climate change “a defining factor in companies’ long-term prospects” and pressed for disclosure of their carbon transition plans, among other things."
"Fink and other BlackRock staffers soon moved to reassure red-state officials that the company wasn’t against fossil fuels."
"“Do I believe the pendulum five years ago was too far? Yes.” Both he (Fink) and BlackRock are “more pragmatic” nowadays, he said."

"BlackRock cut votes on environmental and social issues from 40% to 4%, saying companies have made progress on climate-related disclosures since 2021."

Here is an excerpt from The Wealth of Nations found at The Library of Economics and Liberty.

"Every individual is continually exerting himself to find out the most advantageous employment for whatever capital he can command. It is his own advantage, indeed, and not that of the society, which he has in view. But the study of his own advantage naturally, or rather necessarily, leads him to prefer that employment which is most advantageous to the society."

"But the annual revenue of every society is always precisely equal to the exchangeable value of the whole annual produce of its industry, or rather is precisely the same thing with that exchangeable value. As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it."

So Adam Smith did not think much of the idea of a business intentionally operating for the common good.

In 1970, Milton Friedman said stockholders interests. See A Friedman doctrine‐- The Social Responsibility Of Business Is to Increase Its Profits. In fact, he thought it would be harmful if CEOs worked for stakeholders interests, that is, tried tried make their companies act based on social responsibility. (One of my related posts below, "Should CEOs serve stockholders' interests or stakeholders' interests?" has some quotes from the Friedman article).

The Latest Dirty Word in Corporate America is ESG: Executives switch to alternatives like ‘responsible business’ to describe corporate initiatives (2024)

Wall Street’s ESG Craze Is Fading (2023)

Companies Quiet Diversity and Sustainability Talk Amid Culture War Boycotts (2023)

‘Green’ Funds Cost Three Times More Than You Think (2023)

Should CEOs serve stockholders' interests or stakeholders' interests? (2022)

One of the Hottest Trends in the World of Investing Is a Sham (ESG, environmental, social and governance criteria) (2022)

An Inconvenient Truth About ESG Investing (2022)

ESG Investing Can Do Good or Do Well, but Don’t Expect Both (2022)

The hidden costs of corporate social responsibility (2021)

Why the Sustainable Investment Craze Is Flawed (2020)

C.E.O.s Are Qualified to Make Profits, Not Lead Society (2020)

ESG Investing in the Pandemic Shows Power of Luck (2020)