At any point in recent years, you could believe that ESG investing has either been totally embraced by both the public and investment professional or more recently, that a political backlash in the USA against it being factored into investment strategies for public funds, on the basis of it having a negative effect on returns and thereby breaching their fiduciary duty to retirees and other stakeholders.

At their current growth rate, ESG-mandated assets (defined here as professionally managed assets in which ESG issues are considered in selecting investments or shareholder resolutions are filed on ESG issues at publicly traded companies) are on track to represent half of all professionally managed assets globally by 2024.

The majority of new ESG fund launches over the next 18 months are expected to be in line with principles similar to Article 8, or in other words, with ESG characteristics playing a meaningful role in the investment decision-making process. The debate is shifting from whether ESG investing is a niche to how investment managers should respond.

This blog post explores the reasons behind the backlash and the need to extend or redefine what responsible investing means.

The Backlash against ESG Investing

1. Perceived Lack of Financial Returns: One of the main criticisms of ESG investing is the perceived trade-off between financial returns and socially responsible investments. Critics argue that by focusing on ESG factors, investors may miss out on potential high-performing companies, compromising their financial gains.

2. Skepticism about ESG Metrics: Critics also question the credibility and consistency of ESG metrics and ratings used in assessing companies' ESG performance. They argue that the lack of standardization and transparency in ESG metrics makes it difficult for investors to make informed decisions.

3. Greenwashing Concerns: Greenwashing refers to companies misleadingly portraying themselves as environmentally friendly or socially responsible without truly implementing substantial changes. Skeptics argue that some companies might engage in greenwashing tactics to attract ESG-minded investors, leading to a lack of true impact.

Extending or Redefining Responsible Investing

1. Holistic Financial Performance: It is crucial to recognize that responsible investing does not have to be at odds with financial performance. A more comprehensive approach to responsible investing should consider both financial returns and ESG factors in a holistic manner. This approach allows investors to align their values without sacrificing financial gains.

2. Improved ESG Metrics and Standards: To address the criticism regarding ESG metrics' inconsistency and lack of transparency, there is a need for standardized and reliable ESG frameworks. This would enhance the credibility of ESG ratings and help investors make more informed decisions based on accurate data.

3. Engagement and Impact Measurement: Responsible investing should extend beyond just the act of allocation. There should also be a focus on active engagement with companies to drive positive change. Additionally, investors should assess the impact of their investments in terms of environmental, social, and governance outcomes to ensure their investments align with their values.

4. Long-Term Perspective: Responsible investing needs to embrace a long-term perspective rather than focusing solely on short-term gains. This approach encourages sustainable business practices, the development of socially responsible policies, and responsible governance, which can generate positive impacts in the long run.

Responsible digital transformation may provide a path forward to adopt sustainability initiatives and improve client engagement. More and more stakeholders are including societal impacts in addition to financial metrics when measuring the performance of financial institutions. In order to provide the data needed to perform this type of assessment, investment management firms may benefit from verification or assurance by an independent third party.

In conclusion, while ESG investing has received backlash, it presents an opportunity to redefine responsible investing. By addressing the concerns raised by critics, such as the perceived lack of financial returns and credibility of ESG metrics, investors can create a more comprehensive and impactful approach to responsible investing. With a focus on holistic financial performance, improved metrics, active engagement, and long-term perspective, responsible investing can play a significant role in driving positive change in our society and the global economy.