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Chart: Is ESG Investing in Decline?
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Is ESG Investing in Decline?
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These days, ESG investments have lost their luster given high interest rates, political backlash, and greenwashing scrutiny.
In 2021 during the pandemic boom, U.S. sustainable funds hit a record $358 billion in assets, up from $95 billion in 2017. But since then, investor interest has waned as higher borrowing costs impact capital-intensive clean tech stocks.
This graphic shows the drop in sustainable fund flows—often considered an indicator of investor sentiment—based on data from Morningstar.
Slowing Demand
In 2023, investor appetite cooled for sustainable investments, as fund flows notched their worst year on record.
Overall, flows sank $13 billion as fund performance lagged behind conventional funds. Adding to this, concerns surrounding the murkiness of environmental, social, and governance (ESG) ratings were put under the spotlight.
As ESG pushback intensified in U.S. politics, at least 165 anti-ESG bills were introduced in 2023. Politicians have claimed that ESG criteria negatively impacts financial returns, but evidence behind that is mixed.
While sustainable funds underperformed traditional funds in 2023, a separate study showed that ESG portfolios had as much as 6% excess returns annually compared to benchmark indexes between 2014 and 2020.
ESG Investments: A Closer Look
One key aspect of ESG funds is whether they hold investments that align with the UN Sustainable Development Goals (SDGs).
Globally, 542 funds with $125 billion in assets are associated with at least one of these objectives. The table below shows the top five SDGs, by ETF assets under management (AUM).
SDG | Goal | Number of ETFs | AUM |
---|---|---|---|
SDG 13 | Climate Action | 275 | $65.4B |
SDG 7 | Affordable and Clean Energy | 80 | $15.3B |
SDG 9 | Industry, Innovation, and Infrastructure | 49 | $13.4B |
SDG 6 | Clean Water and Sanitation | 16 | $9.1B |
SDG 11 | Sustainable Cities and Communities | 34 | $5.5B |
Source: Trackinsight. As of January 7, 2024.
We can see that Climate Action is the highest overall, with companies held in these ETFs making commitments to lower emissions and advance sustainability.
For instance, Home Depot has cut electricity use by over 50% since 2010 in U.S. stores, and aims to use renewables for all of its electricity by 2030. In addition, Microsoft has committed to this goal through a number of initiatives, including providing access to clean water to over one million people across Indonesia, Brazil, India, and Mexico in 2023.
While investor interest has slowed, 35% of advisors said they used ESG funds last year, based on a Journal of Financial Planning survey. As the industry matures, it remains to be seen if ESG investments will see a resurgence, especially if interest rates fall in the coming years.
Environment
The Most Polluted Cities in the U.S.
What are the most polluted cities in the U.S. according to data from the American Lung Association’s 2024 State of the Air Report?
The Most Polluted U.S. Cities in 2024
According to the World Health Organization, air pollution is responsible for 7 million deaths annually, and could cost the global economy between $18–25 trillion by 2060 in annual welfare costs, or roughly 4–6% of world GDP.
And with predictions that 7 in 10 people will make their homes in urban centers by mid-century, cities are fast becoming one of the frontlines in the global effort to clear the air.
In this visualization, we use 2024 data from the State of the Air report from the American Lung Association to show the most polluted cities in the United States.
What is Air Pollution?
Air pollution is a complex mixture of gases, particles, and liquid droplets and can have a variety of sources, including wildfires and cookstoves in rural areas, and road dust and diesel exhaust in cities.
There are a few kinds of air pollution that are especially bad for human health, including ozone and carbon monoxide, but here we’re concerned with fine particulate matter that is smaller than 2.5 microns, or PM2.5 for short.
The reason for the focus is because at that small size, particulate matter can penetrate the bloodstream and cause all manner of havoc, including cardiovascular disease, lung cancer, and chronic pulmonary disease.
The American Lung Association has set an annual average guideline of 9 µg/m³ for PM2.5, however, the World Health Organization has set a much more stringent limit of 5 µg/m³.
The 21 Worst Polluted Cities in the U.S.
Here are the top 21 most polluted cities in the U.S., according to their annual average PM2.5 concentrations:
Rank | City, State | Annual average concentration, 2020-2022 (µg/m3) |
---|---|---|
1 | Bakersfield, CA | 18.8 |
2 | Visalia, CA | 18.4 |
3 | Fresno, CA | 17.5 |
4 | Eugene, OR | 14.7 |
5 | Bay Area, CA | 14.3 |
6 | Los Angeles, CA | 14.0 |
7 | Sacramento, CA | 13.8 |
8 | Medford, OR | 13.5 |
9 | Phoenix, AZ | 12.4 |
10 | Fairbanks, AK | 12.2 |
11 | Indianapolis, IN | 11.9 |
12 | Yakima, WA | 11.8 |
13 | Detroit, MI | 11.7 |
T14 | Chico, CA | 11.6 |
T14 | Spokane, WA | 11.6 |
15 | Houston, TX | 11.4 |
16 | El Centro, CA | 11.1 |
17 | Reno, NV | 11.0 |
18 | Pittsburgh, PA | 10.9 |
T19 | Kansas City, KS | 10.8 |
T19 | Las Vegas, NV | 10.8 |
Note: The American Lung Association uses Core Based Statistical Areas in its city and county rankings, which have been shortened here to the area’s principal city, or metro area in the case of the Bay Area, CA.
Six of the top seven cities are in California, and four in the state’s Central Valley, a 450-mile flat valley that runs parallel to the Pacific coast, and bordered by the Coast and Sierra Nevada mountain ranges. As a result, when pollution from the big population centers on the coast is carried inland by the wind—cities #5 and #6 on the list—it tends to get trapped in the valley.
Bakersfield (#1), Visalia (#2), and Fresno (#3) are located at the drier and hotter southern end of the valley, which is worse for air quality. The top three local sources of PM2.5 emissions in 2023 were farms (20%), forest management / agricultural waste burning (20%), and road dust (14%).
Benefit to Economy
While the health impacts are generally well understood, less well known are the economic impacts.
Low air quality negatively affects worker productivity, increases absenteeism, and adds both direct and indirect health care costs. But the flip side of that equation is that improving air quality has measurable impacts to the wider economy. The EPA published a study that calculated the economic benefits of each metric ton of particulate matter that didn’t end up in the atmosphere, broken down by sector.
Sector | Benefits per metric ton |
---|---|
Residential Woodstoves | $429,220 |
Refineries | $333,938 |
Industrial Boilers | $174,229 |
Oil and Natural Gas Transmission | $125,227 |
Electricity Generating Units | $124,319 |
Oil and Natural Gas | $88,838 |
At the same time, the EPA recently updated a cost-benefit analysis of the Clean Air Act, the main piece of federal legislation governing air quality, and found that between 1990 and 2020 it cost the economy roughly $65 billion, but also provided $2 trillion in benefits.
Benefit to Business
But that’s at the macroeconomic level, so what about for individual businesses?
For one, employees like to breathe clean air and will choose to work somewhere else, given a choice. A 2022 Deloitte case study revealed that nearly 70% of highly-skilled workers said air quality was a significant factor in choosing which city to live and work in.
At the same time, air quality can impact employer-sponsored health care premiums, by reducing the overall health of the risk pool. And since insurance premiums averaged $7,590 per year in 2022 for a single employee, and rose to $21,931 for a family, that can add up fast.
Consumers are also putting their purchase decisions through a green lens, while ESG, triple-bottom-line, and impact investing are putting the environment front and center for many investors.
And if the carrot isn’t enough for some businesses, there is the stick. The EPA recently gave vehicle engine manufacturer Cummins nearly two billion reasons to help improve air quality, in a settlement the agency is calling “the largest civil penalty in the history of the Clean Air Act and the second largest environmental penalty ever.”
Learn how the National Public Utilities Council is working toward the future of sustainable electricity.
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