A few items caught my eye last week that seem to signal what I will call a recession in sustainability/ESG for financial services and investors. There are probably more, but here are a few I see as emblematic:
- Numerous media outlets (such as Financial Times) have written about the record outflow of dollars from ESG funds last quarter, with some saying sustainable investing is dead – or on life support. What most articles ignore is that a meaningful proportion of these changes isn’t money actually moving in or out of specific investments. Rather, it is a result of many funds changing their names or investment strategy description away from “ESG” or “sustainability” language in accordance with EU Sustainable Finance Disclosure Regulation (SFDR). Yes, the funds are no longer classified as “sustainability funds,” but that is more nuanced than outflow.
- Bloomberg says that investors are pulling back from Direct Air Capture (DAC) in climate tech. The economics never made sense to me and now others are wondering the same thing: “Not long ago, ‘everybody had a check box on one direct air capture investment,’ [Rajesh Swaminathan, a partner at Khosla Ventures] says. ‘Now, people are stepping back and saying, ‘Why didn’t I look at the economics there?’” Can you say “due diligence“??
- Matt Levine wrote “On Wall Street, which has turned its back on net zero alliances, firms are dropping ‘ESG’ from job titles. And globally, less than 7% of people who took on an ESG role in 2020 still retain an ESG title today.” Investors and financial services firms that made broad, aggressive sustainability announcements a few years ago “have had to acknowledge that the goal of generating the highest profits often ‘isn’t aligned with the social and environmental aspirations of the types of people they hired,’ says Tom Strelczak, a London-based partner focused on sustainability at Madison Hunt.” Perhaps especially when there remains disagreement on the how, what and why of ESG/sustainability value in financial services.
- According to Responisble Investor, Morningstar Sustainalytics laid off 80 employees, only 19 months after a previous round where up to 12% of their employees were let go. Morningstar said the action was “in response to ongoing market challenges.”
- The publication ESG Investor ceased publication after five years. I’m sorry to see that – I considered them a useful and credible information source. Even so, like Morningstar Sustainalytics, they are a casualty of ambiguity of sustainability/ESG alpha, ratings, or even general financial value to investors, combined with a crowded market.
Anyone relatively new to sustainability could take these developments as signs that the ESG/sustainability party is over. In reality, there is a definite silver lining in the big picture even if a bit hard to swallow (I’m having fun awkwardly mixing colloquialisms. I’m no Yogi Berra, but there will never again be another Yogi – even in the future…).
The past few years of sustainability/ESG have been something akin to the “dot com” bubble – meaning the excitement, opportunities and growth were at best loosely tied to business fundamentals. We are now seeing the market rationalize and the mindset/expectations come back to reality. This isn’t a collapse or the death knell of sustainability/ESG – it’s a change from irrational exuberance to business basics.
Like it or not, companies operate on a profit basis. Companies with investors also have legal duties to pursue profit. Those that chase sustainability without regard for business fundamentals will spend themselves out of business, killing any benefits they may have created.
The more sustainability, reality and business fundamentals align, the better off we are. We will enjoy more support (and funding) from executives and other internal departments. There is more clarity on what to do, and how to measure and reward progress. It removes stress and ambiguity from sustainability/ESG professionals uncertain about their future in a business setting. Investors can readily see hard dollar financial value in portfolio company sustainability initiatives, encouraging more investment and supporting stock price stability or improvement.
Members have access to several resources concerning the business value of sustainability, such as the Guidebooks Simplifying ESG/Sustainability Business Value and Practical Methodology for Sustainability ROI Using Company-Specific Business Fundamentals and the Checklist Economic Opportunities for Environmental Improvements. We also maintain a library of curated third party content on the topic along with our blog archive. In addition, we have a groundbreaking project in the works concerning the business value of sustainability that will be exclusive to PracticalESG.com members. Stay tuned!
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