2022 in review: The year of ESG reckoning

As 2022 draws to a close, we’re taking a look back at the biggest stories of the year in the finance space. Companies’ environmental, social, and governance (ESG) initiatives came under close scrutiny, with the SEC proposing new rules, and some investors pushing back on the idea that sustainability should be part of a company’s strategy. Here’s our wrap of the year in ESG.

In 2020 and 2021, ESG funds outperformed the market by as much as ​​4.3 percentage points and overtook the S&P 500 in early 2021, respectively. That was until the clock struck midnight on December 31, 2021 and the new year, along with its new players, came along, forcing a reckoning whose outcome is still undetermined.

“This was the year we learned how dangerous it is to frame ESG as a set of objective performance metrics, divorced from wider questions of the role of business in society.” Alison Taylor, executive director at Ethical Systems and adjunct professor at NYU Stern School of Business, told CFO Brew in an email. “The invasion of Ukraine, the end of Dobbs, and the mounting Republican backlash have all been framed as a ‘reckoning’ for ESG. What they highlight is that there are real, substantive debates to be had about the role of business in addressing social and environmental challenges.”

January—February

Riding the high: Coming off a high from 2021, ESG was still garnering headlines in the early part of this year as fresh stats from Q4 trickled out. In February, Morningstar’s Jon Hale wrote that there were five times as many sustainable funds in the US than a decade earlier, and triple the number of funds from five years earlier.

But funds labeled as “sustainable” came under scrutiny, so much so that Morningstar stripped $1 trillion off of ESG funds in February by removing the label from those the firm deemed not truly “green.” Growth didn’t stop, however; money manager Fidelity expanded its green stack in February, adding four new ESG funds with the intention to actively manage them.

Oh, about that: What began to emerge was the realization that ESG funds likely outperformed the market with such high margins due to their large tech-company exposure, evident after tech stocks began to slide. On Valentine’s Day, Barron’s wrote that ESG funds were “off to a rough start” for the year as funds that had outperformed in previous years were beginning to experience losses.

March—June

Regulation, please: In March came a seismic shakeup in the ESG landscape: The SEC released its proposed ESG rule changes. The updated rule would require public companies to report their emissions impact. This appeared to be the start of what became widespread ESG backlash.

Corporate reporting managers began to consider how to report on ESG. Big Four audit firms started to see the massive potential for an ESG consulting industry, John Wheeler, senior advisor of technology and risk at AuditBoard, told CFO Brew. He pointed to PwC’s intention to hire 100,000 workers to meet its ESG expansion goals and Deloitte investing $1 billion into its sustainability practice.

Chief Twit and his Tweeters: On May 18th, the S&P 500 excluded Tesla from its ESG Index, citing social concerns. In response, CEO Elon Musk (who had quite the 2022 himself!) tweeted that ESG was a “scam.” While the index provider explained how the index decisions were made, the uptick of skepticism around ESG began to gain steam.

And then came the crackdown: At the end of May, Deutsche Bank asset management arm DWS was raided by police after allegations of greenwashing in 2021 were exposed by whistleblower and former CSO Desiree Fixler. Also in May, BNY Mellon Investment Adviser paid the SEC $1.5 million to settle alleged “misrepresented” ESG reviews.

June—August

Hear ye shareholders! 2022 was the busiest proxy season for ESG ever, according to investor intelligence firm Georgeson, with 924 shareholder proposals submitted. Proposals ranged from say-on-pay, board diversity, and increased disclosure, many of which were successful; by the end of June, 282 votes and 34 majority votes backed ESG shareholder proposals, according to data from As You Sow, a shareholder advocacy nonprofit.

But then, a new wind started blowing. Strive Asset Management, an anti-ESG firm started by Vivek Ramaswamy, rose to prominence, and quickly. Ramaswamy’s ETF titled “DRLL,” exceeded $100 million within the first week of launch. And even the strongest of ESG supporters began to call for an overhaul of the space.

September—November

Texas, among the reddest of red states, blocked 10 companies and 348 investment funds—including BlackRock, Credit Suisse, and UBS—from doing business there because as state comptroller Glenn Hegar put it, the funds “boycott energy companies” and “no longer make decisions in the best interest of their shareholders or their clients.

West Virginia and Florida soon followed suit, with Republicans arguing that ESG-driven investing was “harmful” to states’ economies.

Mere days before the midterm elections, Senate Republicans wrote to the largest US law firms warning that if they were advising clients on ESG matters, they would be included in federal antitrust investigations.

It didn’t help ESG hopefuls that the SEC announced it was months away from releasing climate rules guidance after missing a self-imposed deadline in October.

With Democrats controlling the Senate and the GOP controlling the House, the future of ESG initiatives is very much up in the air. But the battles to keep the green finance revolution moving forward are all but certain to continue.

2023 and onward

After riding a high for a few years, 2022 is the year that ESG saw some fierce—and growing—enemies, while 2023 is a crystal ball, we’ll keep a close eye on proxy season votings, SEC movements, and if executives are ready to stick their heads above the parapet for green statements again.—KT