‘Is ESG making a comeback?’ This was a question on a LinkedIn post I read a few weeks ago, which got me thinking.
There is no doubt it has been a tough few years for the sustainable investment industry, but are things starting to feel a little more optimistic again?
Or, is it a case of those who jumped on the bandwagon in the boom of 2020/21 without genuine commitment are now focusing efforts elsewhere, leaving those who are truly dedicated to focus on sustainability?
Perhaps it is a bit of both?
As a journalist who is privy to multiple press releases, reports and thought leadership from investment firms landing in my inbox, and as a daily browser of LinkedIn, it does feel like we are in (yet another) phase for sustainable investment; it feels like we are possibly coming full circle and moving into the place we were meant to be all along.
Commentary
Let me explain by outlining some of the articles and data that have caught my eye recently suggesting things are looking up for sustainable investing. And no, this is not another (perhaps biased) piece from me about the ESG backlash being overblown or unjustified. It is hopefully a reality check on where we are now, and how we need to think about sustainable investing going forward. Because things simply are not the same as they were in the those ESG ‘boom’ years. This area of investment is no stranger to fast-paced change and what we have seen recently is another demonstration of that.
First, in February, PA Future Committee member Andrew Parry, head of investments at JOHCM, wrote about ‘When ESG tourists leave’ in his quarterly reflections for us.
“The political backlash against ESG has a positive side, as it is forcing investors to become more rational and to reconsider some of the more grandiose claims made at the height of the ESG boom. With increased anti-greenwashing scrutiny by regulators globally, politicians’ belligerent attitude to ESG may prove an unintended blessing to asset managers. Little wonder that many ‘ESG tourists’ are leaving the field now that the easy inflows into ESG-labelled funds are drying up.”
On a similar note, in a recent Impact Report, George Latham, managing partner at Wheb Asset Management, said: “‘ESG tourists’ – asset managers that stampeded into the sustainability market just a few years ago – are now packing their bags. This, along with the huge swell of anti-greenwashing regulation, is clarifying the investment offer for retail and institutional investors alike.”
Further, likening the evolvement of ESG to a teenager growing up, fellow PA Future Committee member Ashley Hamilton Claxton, head of responsible investment at Royal London Asset Management asked recently: ‘Has ESG reached young adulthood?’
In the piece, she wrote: “A few years ago, the ESG ‘industry’ was showing the classic growing pains of a teenager. I’d say we’ve now entered ‘young adulthood’. This comes with a greater confidence and self-assurance.
“Yes, we’ll have set-backs (anti-ESG movement), headaches (no more SFDR Annexes please!), and frustrations (1.8 degrees and counting). But we should be thankful, at least we aren’t awkward teenagers anymore!”
In another op-ed, Danielle Labotka, behavioural scientist, and Samantha Lama, senior behavioural researcher at Morningstar, looked at the online language around ESG and found “contrary to what one might expect of conversations about ESG (especially on the internet), ESG-related posts and comments were overwhelmingly neutral in sentiment”.
“ESG was not polarised,” they added.
So maybe it is a case of “clarifying” where fund groups sit now and accepting that it is all part of the industry – not good or bad but approaching things in a different way. And that surely must be healthy, to serve investors’ differing needs.
Risk assessment
Of course, there is the argument that the energy transition is needed for the Earth and humanity’s future, and more firms should be taking action to mitigate and adapt for climate change.
It does appear that, while asset managers are not explicitly launching ESG or sustainable solutions at the pace they were three-to-four years ago, they are instead integrating this into their investment processes across the board.
In a conversation with Peter Walsh, director of ESG market strategy & partnerships at Benchmark Gensuite, recently, he said: “ESG factors are increasingly recognised as material to risk assessment and value creation, and dismissing them can lead to mispriced risks and missed opportunities. Investors who ignore ESG issues are voluntarily putting a blindfold on themselves.”
As a result, he said the anti-ESG sentiment will dissipate, too: “The backlash will fade because so many are working hard to build a sustainable future, from professionals, community groups, and organisations such as CDP, GRI and IFRS that provide the tools we need. The recently-introduced CSRD legislation from the European Union, and the imminent CSDDD, mean the train has left the station, Europe is setting global standards that will overcome the cynical self-interest of the fossil fuel industry.”
So, I’ve rounded some relatively strong comments on the direction of travel for sustainable investment, but does the data back this up?
Flows and performance
When Russia invaded Ukraine in 2022, all markets were hit but sustainable investment products typically underperformed further due to their lack of exposure to fossil fuel energy, at a time when so many were worried about energy security.
Despite this, outflows from sustainable funds in Europe were not as brutal as their traditional counterparts, as Morningstar consistently reported in its quarterly updates.
Further, this year has seen something of a bounce-back. Morningstar reported European-domiciled sustainable funds saw net inflows in the first four months of 2024, after struggling in 2023.
‘Light green’ or Article 8 funds recorded net new flows of £14.2bn in that four-month timeframe, while May was also on track for positive flows at the time of the report being published.
Performance has also picked up; ESG funds outperformed traditional funds and exchange-traded funds (ETFs) in 2023, according to the report ESG Investing: Steady growth amidst adversity by the Institute for Energy Economics and Financial Analysis (IEEFA).
The increasing regulatory requirements for corporates and investment managers around sustainability is having an impact in terms of providing confidence that greenwashing can be deterred.
“The findings indicate that ESG continues to grow and remain relevant, despite the recent backlash against ESG investing,” Ramnath Iyer, sustainable finance lead, Asia, at IEEFA, said.
“The increasing regulatory support and enhanced regulatory developments signal the mainstream adoption of climate, sustainability and ESG policies. It remains important to evaluate, gauge, and mitigate climate change risks when making investment decisions,” said Iyer.
“Even the less stringent US Securities and Exchange Commission’s climate disclosure requirements can be viewed as a first step.”
He added: “Given their need for long-term performance, large asset owners understand the importance of incorporating sustainability outcomes into investment analyses and are likely to continue doing so.”
“Asset owners are integrating ESG more, not less,” added Iyer.
This performance uplift is predicted to continue. Aegon’s Claire Marwick, co-manager of the Aegon Global Sustainable Equity fund, recently said after a difficult few years solar is a sector poised for a bounce back.
“Solar power generation today is the cheapest form of energy generation available to us – even excluding subsidies,” she commented. “So, if one’s motives are purely financial, solar is the way to go.
“The IEA forecasts solar capacity to triple from 2022 levels to 2027 and grow from there. Solar is expected to contribute 22% of our power needs by 2027, from just 3% 10 years ago. This adds up to a very positive demand backdrop for solar companies and that is why we are now looking for opportunities as these headwinds pass.”
She also pointed to life sciences for a “bounce back”, particularly the companies providing equipment for drug development and testing to the pharmaceutical sector.
ESG jobs
The above clearly outlines a shift in sentiment, and that was something that was also seen in the world of recruitment that prompted the post on LinkedIn I mentioned at the start of this piece. John Gillespie, executive researcher at recruiter Farrells Associates, posed the question ‘Is ESG making a comeback?’ as the firm was seeing more and more ESG roles being opened up at private and public investment firms.
“Markets have picked up and we are seeing more roles coming out as well as companies recruiting directly from competitors for ESG roles. There have been a lot more conversations since the beginning of the year.”
However, there is one key difference.
“It’s happening but they are renaming it. Its ‘responsible investment’ or ‘sustainable investment’ in the job titles not ESG.”
Gillespie also said this uptick does feel different to the boom of 2020 when he said there was a “frenzy” of ESG hiring.
“People have been a bit more savvy with all the regulations coming down the pipeline. They are integrating these roles into the investment function, it’s part and parcel rather than a separate team.
“There’s still quite a lot to go [in terms of regulation] so we’re hoping and expecting this to continue,” he added.
Perhaps we shouldn’t be asking ‘is ESG making a comeback’ and looking at it with a different lens entirely.
“It’s not a comeback, it never went away,” said Benchmark Gensuite’s Walsh.
“ESG investment will continue to grow because it is driven by legislation, but more importantly, because it just makes business sense. As the world experiences unprecedented extreme weather events, any investor taking their fiduciary duty seriously will recognise the value in understanding ESG risk and opportunity.”
For me, the next step for the industry is to find a place where we have the sustainable specialist firms or teams that are genuinely committed and dedicated to this area, and haven’t retracted from it during this period of uncertainty. Then we have the asset managers or products that consider ESG factors in their processes as they understand its impact on risk mitigation, but are not going to be singing and dancing sustainability like every fund firm appeared to be in 2020 and 2021.
This is the stage of this sector “growing up” or shedding the “ESG tourists” and the end of the polarisation where you either needed to sit steadfastly in one camp or another. A period of clarification, if you like, after groups have found their feet.
Of course, this is probably not what the scientists want to hear as they have long been calling for more capital to be dedicated to climate change and social impact – as RLAM’s Hamilton Claxton said in her article: “We know finance can be a force for good. The evidence is on our side, and we know if we don’t act now to address some of the most pressing environmental and social issues, we will collectively be much worse off in the long-run.”
But, for now, after a tumultuous few years of backlash and greenwashing, this integration into wider strategies alongside focused sustainable portfolios is where we need to be.
