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Bursting of the ESG (Environmental, Social, and Governance) Investment Bubble

Domestic energy production, economy, and national security in the U.S. have suffered due to politically influenced investments.

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Stock Market's Environmental, Social, and Governance (ESG) Sector Is Collapsing
Stock Market's Environmental, Social, and Governance (ESG) Sector Is Collapsing

Bursting of the ESG (Environmental, Social, and Governance) Investment Bubble

In a significant turn of events, the Biden-era Labor Department rules, which push retirees' pension plans to invest in Environmental, Social, and Governance (ESG) vehicles, are set for revision next year. Meanwhile, the Securities and Exchange Commission (SEC) has decided not to revisit the Biden-era securities regulations that pressure firms to reorient their corporate governance around climate-change concerns, as litigation challenging those rules is pending.

The trend of disinvestment from ESG funds has been evident in recent years. American investors, on net, pulled more than $40 billion out of ESG funds in 2022 and 2023, followed by $19.6 billion in 2024 and another $6.6 billion in 2025, through May. This decline in ESG funds is often referred to as the "ESG bubble burst," a sign of a shift in investor preferences.

The underperformance of ESG investing strategies in 2022 and 2023 is another factor contributing to this trend. Studies suggest that for every $10 increase in the price per barrel of oil, GDP growth is reduced by 0.1 to 0.3 percentage points. With the oil prices remaining high, ESG funds have faced challenges in delivering the returns expected by investors.

ESG funds, which invest with environmental, social, and governance principles in mind, not just to maximize shareholder returns, have been criticized for reducing economic growth, shrinking the tax base, and weakening national security. Furthermore, ESG activism is often accused of strong-arming publicly traded corporations to subvert shareholder value in pursuit of social change.

The ESG moniker traces back to late 2004 when the United Nations Global Compact released a report seeking to connect social policies with financial and corporate action. By 2018, more than one-fourth of U.S. capital in professionally managed portfolios was under the ESG umbrella. However, through the first quarter of 2025, U.S. ESG funds have seen ten consecutive quarters of net capital outflows.

The SEC has taken steps to address these concerns. Early this year, the agency reversed Biden-era guidance that gave ESG activists the agency's imprimatur to coopt corporate annual meetings with social-policy concerns not materially related to companies' bottom lines.

The decline in ESG funds has also been evident in the performance of major players in the industry. BlackRock, the world's largest asset manager and a self-declared ESG leader, saw its 2022 net income drop by 12 percent, even as U.S. energy stocks surged.

The shift away from ESG investing is not limited to the U.S. Global capital flows into ESG funds dropped from $649 billion in 2021 to $157 billion in 2022. This drop in investment is a clear indication that investors are looking elsewhere for their financial needs.

In the U.S., the reopening of federal land to drilling and a sweeping deregulation campaign to accelerate permitting for oil, gas, and critical minerals, under the leadership of Doug Burgum, the Secretary of the Interior and head of the National Energy Dominance Council, reflect a renewed focus on traditional energy sources.

The performance of U.S. energy giants like Exxon Mobil, which largely resisted ESG mandates, contrasts sharply with British Petroleum, an early adopter of ESG principles and aggressive "net-zero" climate emissions goals. From 2015 through 2025, Exxon Mobil generated a 32.77 percent total return for its shareholders, while BP lost 24.03 percent of its value over the same period.

As the trend away from ESG investing continues, it will be interesting to see how the landscape of corporate governance and investment evolves in the coming years.

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