We want to ignore all of the ESG posturings in the headlines and in headlines we have been highlighting for the last few weeks and focus on a core driver of the need for better and more consistent ESG disclosures and ratings – money. However, before that, the second highlighted article, from today's FT goes over our now seasoned argument that the US government needs to take action concerning ESG regulation to get the alignment needed with its climate goals.
Today we just want to focus on the money flows, as summarized in the Exhibit below. We will cover some of the same issues in our ESG and Climate piece later today and have additional exhibits in that report. Looking at all of the ESG and sustainable funds under management globally, and the growth in assets under management is impressive, encompassing both inflows (as shown below) and performance. The inflows in 1Q 2021 were enough to offset the general under-performance of the asset class. Money flows are an issue because the universe of ESG friendly equities is finite and the money flows and the multiple arbitrages provide a significant incentive for greenwashing on the corporate side, and on the investor side likely create a more willing ear for less than robust stories, simply because of a lack of attractive buying options.
There remains a desperate need for more clarity and oversight here and very few stakeholders would disagree. Money managers are at risk of relying on less than robust third partly ESG methodologies, in part because of inconsistencies of process and in part because of inconsistencies in the data they are measuring. We have just completed a review of the EPA US greenhouse gas database for a client and comparing 2019 data with 2018 shows some glaring inconsistencies, leaving us unclear as to whether the 2018 data is more accurate than the 2019 data, or vice-versa.