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The ESG Review: ESG is stronger than ever - like it or not

As world leaders and climate experts continue to debate the tough calls needed to reduce environmental impact and the progress towards the biggest climate goals, it is natural time to take stock of the success - and otherwise - of ESG.

It’s a school report that may surprise you.

Look back to a year ago, and the future of ESG looked pretty bleak. We outlined why 2023 was a year of reckoning, with the projection that the financial sector would adopt a much more cautious approach to what is badged as ESG, or funds labelled as “sustainable”.

Over the course of the year, ESG has continued to be a political football, while both its merits and its shortcomings have been poured over. In many ways, a divide has grown between Europe and the US, where the American anti-ESG backlash has been vocal, while the EU has continued to legislate for carbon reduction policies and appears to want to stay that course.

But in taking stock of where the money behind sustainable transformation of businesses is, the picture is a fairly simple one. More investment - by far - continues to be put into ESG-led funds than is withdrawn by those flying the flag for the backlash.

A simple conclusion to draw from that would be that the backlash captures headlines and may be a big reason why those holding the purse strings have shied away from using the acronym, but that it is largely noise (and a flurry of legal actions, some of which didn’t get very far) rather than being indicative of a flight from investment in sustainable change.

As the Financial Times put it in its long-read article on ESG and the stance of titan fund manager BlackRock this week, “BlackRock is still betting big on the transition to a lower-carbon economy, but the $9.1tn money manager’s emphasis when it talks about sustainability and social issues has changed.”

BlackRock’s funds, the piece continued, have seen net inflows that far outstrip ESG opponents taking money out elsewhere: it alone has taken in nearly $500 billion across the past two years, while Republican-leaning US states have withdrawn a ‘mere’ $3 billion.

Speculation has grown at COP28 this week that there will be some form of global agreement to phase out fossil fuels. One big deal has already been struck over the past week to assure reparations payments to poorer nations impacted by climate change.

The long FT piece ended with prediction that “ESG will be dead within five years”. That may not seem to be a case for ESG being stronger than ever - but if you read the room, the indication is that the vast majority of the investment world believes sustainable business change will create value, but the one-size-fits-all approach to ESG investing and labelling has had its day.

If that comes to pass, we may well be reading that ESG was a movement that achieved what it set out to do, regardless of the stigma that the term picked up along the way.

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

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