ESG is ‘dead’, long live ESG

When Larry Fink, global champion of ESG, claims he’s no longer using the phrase as its become ‘entirely weaponised’ you know that the anti-ESG movement is landing some effective blows.

The ‘woke capitalism’ moniker that has been attached to ESG by some on the political Right in the US (and increasingly in Europe as well) has fuelled an anti-ESG movement which has resulted in legal action against some fund managers that follow ESG doctrine and has also seen some US states ban certain fund managers and outlaw ESG investing.

It has also led to greater caution from some corporates and investors on what they communicate around environmental, social and governance issues. This has resulted in the seemingly diametrically opposed risk that corporates can be accused of both green washing (over promising on their ESG and sustainability performance) and green hushing (failing to communicate enough on the detail of the impact they are driving around ESG).

The anti-ESG / woke capitalism movement argument, that ESG constrains investment choice and fails to allow fund managers to focus on generating returns for their clients, has been exacerbated by stock market gains for fossil fuels companies (on the back on the energy crisis), and research last week from Barclays suggests that around $40 billion has been withdrawn from ESG funds so far this year as investors seek higher returns and lose confidence in some ESG investment strategies.

Yet despite this negative noise ESG remains critical to the reputation and equity story for business. More research, this time from Lloyds Bank Corporate & Institutional, among institutional investors has found that four-in-five are pushing clients to provide credible net zero transition plans, with more than half of the institutional investors surveyed believing that companies have a competitive advantage if they have comprehensive net zero transition plans in place.

While fund managers maybe under pressure to invest in an unconstrained way and to embrace less rigid ESG doctrines, the companies they are investing into are under greater regulatory, public and political pressure than ever to demonstrate that ESG lies at the heart of their corporate strategy.

Soul-searching about the low valuation of UK-listed businesses and lack of IPO and M&A activity in the London markets has been a theme of the past 12 months. Yet that mood of impending doom has started to shift with speculation about major IPOs, such as Shein, Unilever’s icecream business and new entrants like Raspberry Pi, lifting confidence in the UK.

The irony is that in many of these cases, the ESG performance of these businesses is critical to their valuation and whether they will be able to attract the institutional and fund management investment they need to successfully raise the funds they seek from the IPO.

Looking at Shein as one example, some fund managers have already come out and said they need greater disclosure and detail on the governance and ESG performance of the business, citing concerns such as the use of enforced labour, vetting of the supply chain and the wider sustainability credentials of fast fashion.

We also see ESG and governance regularly used as a lever by activist investors, NGOs and corporate suitors as a way to try and force change in corporate strategy and apply pressure to management teams to make strategic changes (and in some cases more radical change of leadership or value creation from break-up, sale or re-direction of the business).

This seemingly conflicted view on ESG (on one hand woke capitalism, on the other a critical determinant of corporate value and strategy) is simplistically explained by time-frame.

Investors looking for quick returns and profit may well feel frustration with the near-term returns driven by ESG investment strategies. Yet in reality they are also aware that any business which is to be investible into the long-term, in a world that continues to break all the ‘bad’ climate records) needs to have a viable plan in place to address climate risk, build a sustainable business model and address the ESG issues that matter to the multiple stakeholders that surround business.

There is also another medium to longer term challenge that business and investment has to address, which is the estimated $9 trillion a year gap that exists in funding needed to deliver the net zero transition (according to figures from the Climate Policy Institute). That money will predominantly have to come from the private sector.

We live in a very tribal world, so perhaps we should not be surprised that ESG is similarly riven by conflicting views and expectations. What remain clear is that corporates cannot ignore ESG, weaponised as the term maybe, it remains a critical yard-stick for investible business, for corporate reputation and for strong leadership teams driving sustainable strategy for business and the world around it.

While ESG funds may not be flavour of the month, any business looking to fund-raise on public markets or through private finance needs to have a strong ESG strategy, transparent reporting and a compelling story to tell or they will not raise the money they seek.