Time for honesty in the face of the ESG backlash

Capitalism requires we make space for the full spectrum and – while it has led to a war of words between the ‘true believers’ and the ‘serious investors’ – it has worked well in growing the movement into something big enough to create change.

What hasn’t worked is the shapeshifting that’s been allowed to take place between these different identities. The vagueness of the terms that have grown up around sustainable finance (ESG, ethics, values, impact, prudence, responsibility) have enabled an unhelpful degree of interchangeability between different concepts, making the industry’s relationship with values and ethics a schizophrenic one.  

When the war in Ukraine began investors were happy to frame their Russian divestments as an act of morality, not an obvious response to sanctions and financial risk.

Speaking to the BBC at the time, Simon Pilcher, CEO of the UK’s Universities Superannuation Scheme, described the “overlap” between ethics and finance, saying there was “a clear financial as well as moral case for divestment”.

On the website of Climate Action 100+, Anne Simpson, head of sustainability at Franklin Templeton, describes the “moral imperative” of considering the social dimension of the energy transition. FTSE Russell uses ESG scores to identify companies doing business ‘for good’, through its FTSE4Good indices.

But now there is a race to backtrack.

You don’t have to look far to find a headline about the Republican fightback against ESG (see Perspective in this month’s issue). Lawsuits have been filed, subpoenas issued and legislation passed – all in a bid to stop institutional investors from adopting sustainable investment practices.

Some dismiss the clampdown as a desperate attempt to protect the fossil fuel industry from higher costs of capital and whip up hysteria among pension savers for political gain. Others argue it is about standing up to a relatively small group of unelected decision-makers who consider their own liberal values when running other people’s money.

In response to all the scrutiny, some of the same investors that trumpeted their good conscience are now insisting they wouldn’t dream of considering anything except profit in their financial decisions.  

But it’s too late. All that shapeshifting has bitten the sustainable finance industry squarely on the backside. A hearing in the Texas Senate saw committee members sloppily conflate risk-based tools such as governance scores and climate stewardship with the pursuit of ethics and ‘woke’ capitalism. And who can blame them? Investors have been exploiting those blurry lines for years.

The ‘ESG backlash’ may be creating obstacles for ESG, but it’s also teaching us a crucial lesson in honesty. Regulators are tightening the rules around using these terms in marketing but to safeguard the reputation of the industry, investors must go beyond this and resist the temptation to switch identities depending on the public mood. 

Sophie Robinson-Tillett, Contributing Editor, ESG
sophie.robinson-tillett@ipe.com