The ESG News Review: Bubble Trouble

In a recovery, and with any fundamental shift in how businesses are valued, and in any cycle of technological disruption reshaping markets, the spectre of a bubble is rarely far away.

Sweeping generalisations such as this do seem out of place at the moment, given that the modern world has never had to respond to a pandemic against the backdrop of climate change, and rapid social evolution.

Yet given the increasing calls for the value of ESG-led change to be more measurable and standardised, fears of a bubble scenario developing unless genuine long-term value is better quantified are surely justified.

There was a stark bubble warning this week from the former chair of the governing board of the world’s largest pension fund, with Bloomberg exploring the cooling of Japanese investors towards so-called ESG stocks.

“The Government Pension Investment Fund (GPIF) needs to go back to its roots, and think about how to analyse if ESG is really profitable, as well as how to evaluate and standardise ESG,” said Eiji Hirano. “It’s a little like an ESG bubble right now, and we should evaluate both the good and the bad.”

A few days earlier, Forbes had questioned whether ESG investing was becoming a bubble or going through a sea change. The Economist doesn’t see it as a bubble and instead has been gently making a case for ESG becoming an intrinsic, central aspect of how corporations will be valued – while giving the prospect of a bubble a thorough going-over.

Forbes also makes the point that “greenwashing may finally become counterproductive”.

Again though, concerns are being raised about an unchecked rise in ESG investment and the lack of genuine standards with which to measure apples-for-apples when determining how a company’s ESG-centric strategy stands to enhance broad stakeholder value. Investors Chronicle’s take was “Regulators in the UK and the US are also formulating policy, but the approach is to steer companies and asset managers away from 'greenwashing' by citing ESG within existing marketing rules.”

Meanwhile, the Financial Conduct Authority (FCA) has outlined proposals for new regulation governing disclosure of companies’ environmental credentials. With bubble-talk unlikely to recede, regulators will surely impose more controls on the provision of evidence across many aspects of ESG.

This all adds more fuel to the fire around communicators needing to not only ensure ESG strategy, and progress in delivering on it, is shared effectively and appropriately with multiple stakeholder groups, but that they work more closely with the leadership of the business to listen, act on and respond to the needs of those groups as it navigates such heady change.

We may not need to worry so much about the bubble bursting anytime soon, but need to worry about the way in which ESG investment grows, and what it means for managing expectations around it.

The ESG News Review is written by Steve Earl, a Partner at BOLDT.

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