ESG funds had a terrible year but traders kept investing anyway

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ESG funds — investments that evaluate companies using environmental, social and governance factors — just survived a tumultuous 2022. They also managed to perform in line with the general market while doing so, and attract new money — a good sign for the future of responsible investing.

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What’s happening: Russia’s war in Ukraine forced traders to reconsider investing in certain energy and weapons stocks. That increased scrutiny also played into political differences around ESG investing and opened the door to vocal critics.

Responsible investing funds also came up against mighty economic headwinds. These funds’ outsized investments in tech stocks and lack of energy stocks (which was the only positive sector this past year), led to a noticeable losses for ESG funds in general last year.

Energy was the best performing market sector in 2022 returning some 66% while the broader tech sector lost 28%.

Still, sustainable investing generated returns similar to the market. The broad Morningstar US Sustainability Index fell 18.9% in 2022; the S&P 500 fell 19.4%.

On a global scale, ESG funds also attracted positive investment flows even as money was pulled from broader funds, according to Refinitiv Lipper data provided exclusively to Before the Bell.

Hedge funds and other institutional investors sold stocks and held cash instead. Goldman Sachs reports that funds increased their cash holdings to around 2.5% of their total portfolios last fall. That’s a full percentage point higher than where it was at the end of last year and the highest level since the beginning of 2020.

But ESG inflows remained strong, especially abroad. ESG accounted for 65% of all flows into European ETFs in 2022, according to Morningstar data.

The takeaway: “The overall takeaway from 2022 is that ESG products drew more consistent inflows and ended the year in positive flows territory while the broader funds market saw negative overall flows for the year,” said Robert Jenkins, head of global research at Lipper. “This is a good indication that, despite some of the questions and debates around ESG, the underlying trend remained intact through one of the most challenging investment markets in a generation.”

A trillion dollar coin won’t solve US debt problems

There’s no such thing as a free lunch, and there’s definitely no such thing as a $1 trillion platinum coin. But both would be nice.

The idea of this super-coin has become a popular hypothetical solution for US debt woes as the country again hits its self-imposed debt limit and faces the possibility of defaulting on its debts.

Here’s the idea that some Biden administration officials and Democrats have floated: There’s an obscure law that allows the US Treasury to mint and circulate platinum coins in any denomination. The Treasury could mint a coin worth $1 trillion, deposit it with the Federal Reserve, and allow the government to keep paying its bills.

Sounds simple enough, right? Experts don’t agree. Economists say that this audacious way of avoiding default would shake the confidence in the dollar and US Treasury as much or even more than an actual default. Stoking inflation is also a real possibility when you add $1 trillion to the US economy out of nowhere.

This weekend, Treasury Secretary and former Fed Chair Janet Yellen put the kibosh on any trillion dollar coin plans, explaining that the Federal Reserve likely wouldn’t accept it.

“It truly is not by any means to be taken as a given that the Fed would do it, and I think especially with something that’s a gimmick,” she said in a Sunday interview with The Wall Street Journal. “The Fed is not required to accept it … It’s up to them what to do.”

The real impact: Yellen on Friday told CNN’s Christiane Amanpour that the impacts of a debt default would be felt by every American.

“If that happened, our borrowing costs would increase and every American would see that their borrowing costs would increase as well,” Yellen said. “On top of that, a failure to make payments that are due, whether it’s the bondholders or to Social Security recipients or to our military, would undoubtedly cause a recession in the US economy and could cause a global financial crisis.”

Dire warnings of debt ceiling trouble aren’t new, reports my colleague Alicia Wallace. Federal lawmakers have reached agreements in the past, and this Congress has some time — until at least early June, according to Yellen’s public estimates — to reach an agreement on whether to raise or suspend the debt limit.

Brazil and Argentina could create a new currency

Brazil and Argentina are beginning preparations for a new, common currency according to an article penned by Brazilian President Luiz Inacio Lula da Silva and Argentine leader Alberto Fernandez.

“We intend to overcome the barriers to our exchanges, simplify and modernize the rules and encourage the use of local currencies,” they wrote in the article, published this weekend by Argentine website Perfil.

“We also decided to advance discussions on a common South American currency that can be used for both financial and commercial flows, reducing costs operations and our external vulnerability,” they said.

Lula also mentioned the idea of a common currency during his campaign and politicians from both countries discussed the idea in 2019 but were rebuffed by Brazil’s central bank.

The inflation rate in Argentina was 94.8% in December.

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