Sustainable investing shifting towards materiality with better performance outlook.
From Morningstar: 2025-07-03 05:32:00
Sustainable investing has struggled, labeled as “woke investing,” targeted by the Trump administration, and criticized for poor performance. However, recent data shows a turnaround in sustainable funds’ performance.
Criticism arises from the broad definition of “sustainable investing,” encompassing various objectives. Money managers struggle to explain this divide, leading to controversy under the new presidential administration.
The backlash against ESG has prompted a shift towards materiality, focusing on financial relevance in sustainable investing. Experts discuss the different meanings of materiality and its impact on various asset classes for better returns. Companies are urged to address ESG risks impacting competitiveness. In the US, 43% of the workforce is nonwhite, highlighting the importance of creating diverse workplaces for optimal productivity and profits. Educational attainment has risen for women and people of color, emphasizing the need for inclusive environments for all employees to thrive.
Investors interested in ESG risk should focus on materiality to the company, using resources like the SASB materiality map. DEI initiatives may be more crucial for consumer retail companies like Target, with diverse workforces and customer bases, compared to industrial machinery companies like Deere.
Future material risk factors, such as climate change and environmental damage, can impact a company’s financial performance over the long term. Investors should consider these risks alongside ESG data and engagement with companies to ensure they are addressing material risks and opportunities effectively.
Values-driven investors seek to make impact investments in areas like affordable housing and renewable energy. Materiality frameworks can help guide investment decisions, such as avoiding municipal bonds with credit downgrades due to environmental disasters like wildfires.
Engagement with companies is crucial to ensure they are addressing material risks and opportunities effectively. Despite potential pushback against ESG efforts, companies need to prioritize transparency and action in addressing ESG risks to maintain investor trust and long-term success in sustainable investing. The current market volatility is seen as a necessary correction by experts like Williamson, who believes the noise will eventually subside. There is optimism that the situation is not as dire as it seems, with comparisons made to a scrimmage rather than a full-blown battle. No ownership of mentioned securities is claimed by the author.
Read more at Morningstar: Here’s Why Sustainable Investors Are Hearing About Materiality