After having enjoyed a period of extreme popularity, ESG investing, or social impact investing appears to be on its way out in investing ‘trends’. According to CNN at least, mentions of ESG in company reporting are on a steady decline after having peaked in 2021. This claim is backed by the fact that at least 165 bills and resolutions that obstruct ESG investing have been introduced in 37 states across the US in 2023 alone. According to such reports at least, ESG investment is a mere buzzword that has been overused to near meaninglessness.
Is the phrase ESG investing losing its popularity due to political influence? Does that mean social impact investing is a dead concept? I think not.
‘Environment, Social, Governance’
ESG investments can be broken down into three components, environment, social, and governance, which are the considerations for which the acronym stands. When it comes to actually making business decisions, these elements can hardly be considered individually. Social considerations affect the environment and governance affect both, and vice versa.
Unfortunately, ESG investing has since recently come under fire for being ‘woke investing’ which prioritises ‘leftist’ values over the profit interests of the investors. These criticisms accuse ESG investing companies of promoting narrow political values at the expense of the funds of the people of which they are the stewards. Indeed, doing so would certainly be wrong, as the clientele of such companies could conceivably enjoy lesser rewards for their hard earned wealth, while promoting policies that they might not necessarily support. However, this argument deliberately confuses two different things together to prove its point.
For one, ESG investment companies and ESG investing are two different things.
ESG investment companies promote ESG investment as a product they offer, and promote ESG values in order to popularize them. Such companies should not disguise their intentions from their clientele, and should make value-based investments with their consent.
ESG investing is when individuals or organisations take ESG values into consideration in deciding where they want to invest and what kind of future they want to invest in.
It is an interesting exercise to speculate on why someone would deliberately want to confuse the two.
New fad, or a sustainable concept?
Anti-ESG proponents argue that ESG is simply a new fad that gained traction on popular media and is now in the process of ‘spiralling’. But social impact investing is not exactly a new concept. Incorporating sustainability principles into how business is done is a movement that started slowly and overtime, and of which ESG is only the latest iteration.
CSR, green or sustainable accounting, ‘People, planet and profits’ are all past incarnations of the same idea. At its core, these ideas all try to correct extreme profit-driven business activities that prioritise short-term profits over long term losses. ESG simply seeks to widen the scope of businesses to incorporate their impact on society, the planet, and capital owners to ensure that the company is sustainable in the future.
Business viability of social impact investing
The current economic climate of high inflation, climbing interest rates, and economic volatility has resulted in lower-than-expected growth figures in many business sectors. This is also true of ESG investing. In addition, the Russian invasion of Ukraine also saw a spike in crude oil prices, which gave higher rewards for investors in the oil industry.
Those who invested in sustainable energy industries missed out on this dubious opportunity. Greenwashing allegations and underperforming profit figures have once again bought the debate of prioritising the future before present profit to the forefront.
However, underperformance does not equal losses, and market volatility is yet to toll the funeral bell for social impact investing. Most anti-ESG movements are driven either by politics or narrow profit motives. The anti-movement is particularly powerful in the US, where it is thought to have started in West Virginia, in 2021. According to a UK-based think tank that reports on corporate climate lobbying, a coal industry association helped draft an anti-ESG bill to protect the fossil fuel industry. The bill fell through in West Virginia, but a similar one made the cut in Texas. As described above, the movement has gained some traction throughout the US.
ESG: a thriving investment avenue
The anti- ESG movement is not a reflection of market interest. In 2022, a KPMG survey of more than 1300 global CEOs found that 69% of them are facing increasingly rising stakeholder pressure to improve ESG reporting transparency in their respective companies.
In the same year, the EY Global Reporting and Institutional Investor Survey found that 78% of investors would much rather have companies take ESG values into consideration in making investments, even if it affects profit in the short term.
How these business interests, for sustainability interests are business interests, should be enacted is still up for debate. As has been shown, ESG is only the latest iteration of a business interest that is more than just a ‘trend’. ESG investing is yet to benefit from industry and regulatory standards to promote best practices. For example, companies are yet to decide on what information should be recorded as a part of ESG reporting, and what numbers and percentages would be significant enough to keep records of.
As commercial activity continues to evolve in response to business and consumer trends, it is highly possible that we may see the term ‘ESG investing’ dwindle in use. However, social impact investment will likely continue under a different name, and with different buzzwords attached. The concerns of social responsibility investing remain financially relevant whether they are taken into consideration or not. Insurance companies for example have even been seen closing up their metaphorical (and literal) shop in Florida and in California, where regressive legislation has seen a drawback in ESG investing, due to the climate-related financial risk of those areas.
Protecting environmental, social, and governance considerations in the business environment is in everyone’s best interest, including those who are primarily concerned with profits. Sustainability is the number one consideration in any investment proposition, and social impact investment is only an extension of its scope. Its name might change in the future but as the saying goes, a rose by any other name would smell as sweet – we only need ensure that the garden lasts for future generations to enjoy.
(Theruni Liyanage)