Is ESG Beyond Redemption?

2023 has been a tough year for the beleaguered abbreviation ESG, with a global backlash against the term and money pouring out of ESG funds, three headlines this week highlighted ESG’s rough patch:

FT: “ESG is beyond redemption: may it RIP”

NYT: “Is ESG Falling Out of Favor?”

CNN: “ESG investing is dying on Wall Street. Here’s why”

Both the CNN and NYT articles refer to the declining capital flows into ESG funds, which just suffered their worst quarter. For the first time, US money managers closed more ESG funds than they opened.

The NYT article points to the Republican boycotts, a crackdown on greenwashing, and subpar investment returns leading to the shrinking ESG fund market. However, despite the slump, the ESG fund market isn’t going anywhere soon.?

According to Morningstar’s Alyssa Stankiewicz , the main reason for ESG fund divestments was unmet “performance expectations” rather than sustainability advocates having “a change of heart about topics like climate change or diversity.”

CNN took a more negative view, claiming: "ESG investing is fundamentally broken.” Robert Jenkins of financial data provider Lipper said,? “When you have a fracker getting an ‘A+’ on the environment and you have a company like Netflix getting a ‘D-‘ on the environment, that makes no sense.” He claimed he would abandon the concept and opt for “responsible investing” to drive capital toward sustainable endeavors.

The Financial Times article, an op-ed written by Stern School of Finance Professor Aswath Damodaran , opened with the scathing line, “Born in sanctimony, nurtured with hypocrisy and sold with sophistry, ESG grew unchallenged for a decade, but it is now facing a mountain of troubles, almost all of them of its own making.”?

Damodaran criticizes ESG’s continually evolving vague definitions, unsubstantiated claims of reducing risk and increasing value, and the inconsistency of promoting both higher returns and lower risk. Ultimately, he concludes that ESG is beyond redemption, driven more by good intentions than sound financing.

The Rumors of ESG’s Demise are Exaggerated?

While some of the criticisms may be valid, proponents of ESG made their case for why it is still a critical way to align capital with values and principles beyond purely financial considerations.

In a viral post rebutting the FT article, London Business School Professor Ioannis Ioannou called it “a superficial critique” of ESG. He highlighted empirical evidence supporting the positive correlation between ESG performance and financial results, lower capital costs, and reduced stock price volatility. He also asserted that ESG fosters transparency, accountability, and stakeholder engagement, all crucial elements for long-term investment success.

Backing up ESG’s defense, a global survey of asset owners from The London Stock Exchange Group found that, although there is a short-term decline, asset owners are still steadfast in considering sustainability in their investment decisions in the long term. Another study from Cerulli Associates revealed that asset managers are more cautious about ESG investing, but none of those surveyed said they would stop considering ESG in investments.

Brazil, Australia Mandate Climate Reporting?

The list of countries creating sustainability reporting regulations keeps growing. This week, Australia released a draft proposal requiring companies to report climate-related data in alignment with the ISSB climate-related disclosure standard. The Australian Accounting Standards Board (AASB) will use the ISSB S2 standard as a baseline but with some key differences, one of which includes certain reliefs for Scope 3 disclosure.

AASB Chair Dr. Keith Kendall said, “... internationally aligned (climate) reporting requirements for large entities will provide Australians and investors greater consistency, transparency and accountability.”

Brazil also announced it will begin requiring climate reporting for publicly traded companies in 2026 based on the ISSB standards. ISSB chair Emmanuel Faber said of the move, “I commend the Brazilian Ministry of Finance and Comiss?o de Valores Mobiliários for providing clarity to companies and investors in Brazil by setting out a clear roadmap towards mandatory adoption.”

The Global Shift To Green Energy is Unstoppable

A new report from the International Energy Agency (IEA) revealed that the global shift toward clean energy is unstoppable. The World Energy Outlook Report for 2023 commended the significant progress on clean technologies, with one in five cars being bought in 2023 an electric vehicle vs. one in 25 just three years ago. It revealed that half of global energy will be from clean sources by 2030. The report concluded that although investments in fossil fuels are essential for energy security, they are currently double what they should be.

IEA Executive Director Fatih Birol said, "The transition to clean energy is happening worldwide, and it's unstoppable. It's not a question of 'if,' it's just a matter of 'how soon' - and the sooner, the better for all of us,"?

Taking California’s Climate Regulations to the World

Ahead of a likely 2028 Presidential bid, California Governor Gavin Newsom was in China this week to sign five agreements aimed in part at exporting some of California’s climate policies and technologies.

Governor Newsom met with Chinese leader Xi to discuss climate-related issues. He claimed that improving relations between China and California will be vital to limit global warming, adding “that California will remain a stable, strong, and reliable partner, particularly on low-carbon green growth.”

Sustainability in Private Equity

A new BCG report from the ESG Data Convergence Initiative (EDCI) reveals the progress Private Equity (PE) firms’ portfolio companies have made on social and climate-related issues in 2023. The key takeaways include:

• Privately held companies create new jobs at a quicker rate than public companies (as shown in the above image)?
• Larger private companies are decarbonizing faster than their publicly traded counterparts.
• Private companies lag behind public companies on board diversity.
• Private firms lag behind their public peers in renewable energy use.

The views expressed on this website/weblog are mine alone and do not necessarily reflect the views of my employer.?

Other Notable News:

• Hurricane Otis, which left death and destruction in Acapulco this week, went from a tropical storm to a category 5 hurricane in 24 hours. Scientists blamed climate change on rapid intensification, leaving people no time to evaluate and escalating the destruction. Rapidly intensifying storms are likely to increase in the future.
• The melting of the West Antarctic sea shelf is now “unavoidable.” A new study revealed that the Thwaites glacier, also known as the “doomsday glacier,” is at risk, which, if it collapsed, would add an additional 65 cm of sea-level rise, causing devastating flooding.?
• The EU must cut emissions three times their current rates to meet decarbonization goals. The State of the Energy Union Report revealed that current policies will cut emissions by 43% by 2030, far below the 55% goal.
• The U.S. Department of Energy (DOE) has selected seven regional clean hydrogen hubs (H2 Hubs) for potential federal funding of up to $7 billion under the Infrastructure Investment and Jobs Act. The hubs aim to accelerate the development of a low-cost, clean hydrogen market in the US.
• The Federal Trade Commission (FTC) is seeking comments on its Labeling Requirements for Alternative Fuels and Alternative Fueled Vehicles, including electric vehicle (EV) charging stations. The rule, which hasn't been reviewed for a decade, requires disclosure of specific information on charging stations. The FTC is interested in feedback regarding how this information should be displayed and in what format.?
• AI is coming to climate tech. Amsterdam-based startup Overstory raised $14 million this week to develop its AI-based product to reduce the risk of wildfires and power outages. Overstory uses predictive AI to enable better vegetation management.
• Companies find a $400 million loophole in the EU and UK Emissions Trading Systems. Companies are getting credits for shuttered chemical and heavy metals plants. Officials are working to close the loophole.

Notable Podcasts:?

• I was interviewed for ESG Insider: A podcast from S&P Global. This was taped in front of a live audience in New York. We focused on what to expect from the evolving climate disclosure landscape.
• In this week’s episode of the BBC’s The Climate Question, the hosts asked the podcast listeners how they stay positive in the face of the climate crisis. Some get involved in like-minded communities to take action where they can. Plus, the hosts talk to a psychologist about how to deal with ‘climate anxiety.’
• This week’s episode of Outrage and Optimism features an ensemble cast of shipping experts as they help host Christiana Figueres Christiana understand how to make shipping more sustainable. Together, the team explores how the shipping industry is at the forefront of an exciting transition to net zero and will explain how greening the maritime sector could help us address the climate emergency.