In its most elegant form, a great communications program is about simplicity of message and awareness of risk. Those two elements create the basis of successful outreach and engagement.
Simplicity of message: does our audience understand what we’re trying to convey? And awareness of risk: are we prepared for the ways in which our message can be distorted or recontextualized?
Fascinating, then, that one of the most important financial evolutions of the past century is so far afield from both of these safe zones.
Environmental, social, and governance (ESG) integration is a no-brainer in terms of its functionality and goals. It provides data that complements traditional financial inputs to paint a more complete picture of an investment, allowing investors and analysts to make better decisions.
Application of such data is not a controversial development. There is no field of study, practice, manufacturing, or service that has ever turned away relevant data. “More and deeper insights to help us plan and execute? Yes, please!” said everyone, always.
Yet ESG has faced tremendous backlash. Headlines rage against it. Conservative politicians bash it mercilessly. Even as investment professionals frame the negative sentiment as “noise without signal,” they are forced to contend with an external perception that integrating ESG is somehow an unpalatable proposition. Some believe the negative associations will eventually force the term out of circulation.
What went wrong?
Simplicity of message. Awareness of risk.
But why do we need a unified ESG communications strategy?
Let’s be honest, everyone who was neck deep in ESG knew there was a communications problem many years ago. The glossary was out of control, with socially responsible investing, sustainable investing, responsible investing, impact investing and ESG all representing nuanced pieces of the same overall principle: that factors beyond the balance sheet matter.
The differences across all these terms lay in who the factors mattered to and what the preferred outcomes would be. But when presented to the general audience, they were continuously conflated – and in some cases, industry leadership was at odds about which terminology was most accurate. It was a jumble of acronyms and phrases bouncing around like cubes in a shaken Boggle set.
Practitioners did their best to stick to the definitions that best suited their discipline. That further complicated matters, as trusted professionals used different words to describe the same thing. Organizations like CFA Institute, US SIF, GIIN, SASB (now ISSB), and others tried to lead the way by developing a lexicon. None stuck.
There was a key moment at which a global communications strategy would have been effective. That window was between COP21, which yielded the Paris Agreement in 2016, and when BlackRock announced its initially strong position on ESG integration in 2019. In those years, the world was curious and attuned to the intersection of finance and sustainability. There was an openness to vehicles that would move us forward. Clear, consistent messages about sustainable investing, ESG, and impact investing in private markets would have provided three tracks on which to focus. The lexicon could have been contained, and we’d see a different dialogue today.
Hindsight is great, I know – although I also know I’m not alone in this conviction. Some organizations (CFA Institute in particular) clearly recognized the need for widespread education and a shared lexicon. By launching their ESG certification program and guidebooks on best practices, CFAI took an early stand on promoting ESG as integral to the research process for the next generation of Chartered Financial Analysts. Long term, those efforts will show merit.
Simplicity of message (not so much)
Anyhoo, here we are in reality, and that whole unified messaging thing didn’t take root. We instead saw a fragmented, expansive ballooning of terminology and jockeying for position.
See these widely varying definitions as a case in point:
From the SEC: ESG investing is a way of investing in companies based on their commitment to one or more ESG factors. It is often also called sustainable investing, socially responsible investing, and impact investing.
From the CFA Institute: ESG stands for Environmental, Social, and Governance. Investors are increasingly applying these non-financial factors as part of their analysis process to identify material risks and growth opportunities.
From Investopedia: ESG investing refers to a set of standards for a company’s behavior used by socially conscious investors to screen potential investments.
From Wikipedia (yes, had to check Wikipedia!): Investors may use ESG data beyond assessing material risks to the organization in their evaluation of enterprise value, specifically by designing models based on assumptions that the identification, assessment and management of sustainability-related risks and opportunities in respect to all organizational stakeholders leads to higher long-term risk-adjusted return. [original source, Sustainability Accounting Standards Board]
So, um – what is ESG then, and what is for, and why do I need it? Throw a dart at the spinning Wheel of Jargon to find out.
The result of this non-unified, overly complex messaging? Confusion, plain and simple. Investors who believed in sustainable finance sought it out on their own, fighting through the chaos to find options that aligned with their goals.
Those who didn’t believe stayed quiet and went about their business…
Risk awareness? Uh, no.
…until now!
Enter the Detractors, who saw the sprawling, messy communications as a lovely playground in which to wreak havoc. “All I need is a bunch of confused people and a couple bad apples,” they said. And those ingredients were supplied in bulk.
We’ve covered the communications part. The bad apples dropped from institutional trees, as greenwashing among asset managers rightfully became a regulatory concern. Companies misled investors, mislabeled and mis-marketed product, and in general looked to profit from the influx of demand for sustainable investing and ESG.
The ESG-indoctrinated were ready for this; any industrial evolution requires testing of boundaries. Greenwashing was seen as a necessary evil yet natural phase that would spur greater regulatory oversight and essentially lead to a more formalized ESG playing field. That is indeed happening: Europe has strengthened its ESG requirements and the SEC is slowly (slooooowwwwwlllly) following suit.
What ESG leaders did not adequately prepare for is the fallout from when bad apples were held accountable. A sound strategy would have seen messages deployed from every corner of the ESG-o-sphere that endorsed evolution. Instead, we heard very little. Most leaders stayed quiet out of fear that they, too, would be stretched out as an example for public shaming.
The door to tear down ESG was thereby flung wide open. Detractors seized on the confusing language and an inherent fear of being led astray by “big business.” One of the greatest, least reasonable, most “factless” smear campaigns in the modern era was unleashed on poor, boring, well-intended ESG.
How do we know we could have done better?
First of all, duh. Planning, foresight, and collaboration would have at least shown a form of strength in the face of adversity.
Second of all, we know what might have been because we saw glimmers of it in early 2023. After the second or third wave of anti-ESG attacks and U.S. state legislation, leaders of the world’s largest financial institutions all went on record with public statements about the value of ESG (more detail on that here).
They used the same language. They did it at the same time. They sent it through multiple channels.
That’s what a coordinated communications strategy looks like. And soon after that phase, we saw states backpedaling from their legislation that would ban ESG. Coincidence?
What comes next
It’s not over yet. It’s very possible that ESG will vanish as a term, while its functionality remains embedded in the research process.
There is new hope, however, for the war of words over sustainable investing. Did we learn anything? Can we emerge from this rageful, spinning silliness and agree that regardless of political affiliations, having the choice to deploy capital in a responsible manner is intrinsically a good thing?
My answer is yes! But we need simplicity of message.
We need awareness of risk.
We need a communications strategy.
And we might all need some deep breaths along the way.
