(Bloomberg) -- First, no one had heard of it. Then everybody was touting it. Now, people are rethinking what it is.

Environmental, social and governance investing has entered “Phase 3,” according to Markus Müller, the chief investment officer for ESG at Deutsche Bank AG’s private banking arm.

“With Phase 3, we are likely to have both consolidation and reorientation in ESG investing,” he said. “I don’t think that investors will materially reduce or stop allocations to ESG as they wait for better information, but they will continue to reassess and reorient investment approaches.”

The big game-changer for ESG this year was the energy crisis. Fund managers who weren’t exposed to energy assets are now regrouping to make sure they don’t get wrong-footed again. Müller points to the huge gains ESG investors have missed out on by snubbing oil and gas assets, with the S&P 500 Energy Index up almost 60% this year, while the broader S&P index is down about 20%.

That “performance shortfall has led to a broader debate” within the ESG fund industry, according to Müller.

The challenge ESG fund managers now face is figuring out whether to include “certain potentially problematic sectors” in their ESG strategies to make sure investment clients don’t miss out on returns, Müller said.

Such observations come as ESG faces its toughest year yet. Vladimir Putin’s war on Ukraine revealed that billions of dollars in ESG funds had been placed in Russian state-backed assets, as some strategies failed to protect investors from clear social and governance risks. Those losses were exacerbated by a boom in commodities that ESG investors had tended to steer clear of. And tech stocks, a staple of ESG funds, slumped.

As if that weren’t enough, financial firms embracing ESG strategies have found themselves on blacklists in a number of Republican states in the US. Combined with a tougher ESG regulatory environment, ESG fund managers are therefore arguably enduring the toughest phase of their careers.

Meanwhile, the need to invest in asset classes that enable a transition to a lower-carbon economy is greater than ever, Müller said.

“It is essential we have a broad and wide-ranging debate about how to deal with current economic transformation,” he said. “This debate will encourage better information flows that can underpin future ESG investment approaches.”

Ultimately, money will continue to flow into ESG, according to Müller.

“I don’t see any long-term reduction in ESG allocations,” he said.

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