What a year for the world of ESG (Environmental, Social, and Governance). Pretty much went from skyrocketing in popularity to besieged on all sides. Perhaps ESG is facing that age-old conundrum, if you get too popular, haters gonna hate.
But the conflict between pro- and anti-ESG is at its heart a war of words. It’s largely a communications issue in which jargon and assumptions have been weaponized. It’s about agendas more than effectiveness – and as we’ve seen over the past few years, “alternative facts” created to support an agenda tend to make it hard to move in a sound direction.
To wit, consider a few recent headlines and sentiments that have been expressed in varying media…ESG is dead, ESG is a failure, ESG is making climate change worse (really, that’s out there). None of those ideas are remotely accurate. My personal favorite is the argument that ESG funds have underperformed since Q1 of this year – with no recognition that the entire market has been in a tailspin.
The real picture of ESG’s standing is much different, and is summed up pretty neatly by three facts:
- The largest asset managers in the world are committed to ESG.
- The largest corporations in the world are increasing their focus on ESG.
- Education for the next generation of analysts emphasizes ESG.
Let’s dig in a little:
Who controls the money?
There’s a lot of noise about how ESG assets are flailing, but the truth is that those with the dollars call the shots. BlackRock, which certainly has a “mixed” ESG history, just announced the launch of a new multi-asset ESG fund. The firm is currently getting flak in the US in part because specific states object to its reduced position on oil and gas, and these detractors are pushing in exactly the opposite direction of the rest of the developed world. It’s a losing battle.
That trajectory is underscored by a recent PWC study that found ESG will remain a priority for asset managers worldwide. “Asset managers globally are expected to increase their ESG-related assets under management (AuM) to US$33.9tn by 2026, from US$18.4tn in 2021,” the report noted. “With a projected compound annual growth rate (CAGR) of 12.9%, ESG assets are on pace to constitute 21.5% of total global AuM in less than 5 years.”
ESG is still evolving as an investment tool, but it’s doing just fine. Perpetuating false narratives about its adoption only serves to distract us from the real work of building, regulating, and measuring strong offerings.
Who gets the money
Public companies are beholden to shareholders. Not all shareholders agree on the importance of ESG factors, but the data clearly shows that organizations are taking it seriously. KPMG’s Sustainability Reporting Survey found that “around three-quarters of reporting companies conducted materiality assessments and are disclosing material topics… The pressure on businesses to report on non-financial metrics is only expected to grow as regulations evolve.”
Seventy-five percent is a big number. Even if a recessionary environment slows the pace of resource allocation, there’s no indication that the corporate world is going to suddenly reverse course and tell employees, communities, and analysts that it doesn’t believe in gauging how ESG factors play into the business.
Who will carry the (solar-powered) torch
But, you say, it’s a fad! That would be easier to believe if there weren’t dedicated educational programs training the next generation of analysts and business leaders on the nuances of ESG as part of their core curriculum.
The Wharton School is one of many high-profile, high-reputation business programs to introduce an ESG major, and the CFA Institute’s ESG certification program is creating a new wave of analysts who understand how ESG factors reflect strengths or weaknesses of a company’s position.
What does all this mean?
Especially in the US, the volume and conflict around ESG are turned way up. Companies are unclear on regulatory direction, recession-wary, and conservative-leaning politicians who rely on oil and gas revenues are highly resistant.
Those are headwinds. The tailwinds, though, show no evidence of dying down in the face of the storm. The data are telling all of us to embrace ESG at the individual, company, and economic levels.
If you have questions about authentically managing and communicating about ESG, we’re here for you.
