2022 was a tumultuous year for ESG investing with a backlash coming not only from the left and right of the US political spectrum, but also from Europe and even the Nordics. 2023 was not the year that the anti-ESG backlash has finally subsided, but there has been some promising developments for its future. In taking stock of this year’s developments, perhaps we can also envision what lies ahead.
No concept has been more vilely attacked in the past few years than ESG investing, and the United States carries the brunt of the burden when it comes to anti-ESG backlash. Since 2021, nearly half of all US states have instilled some sort of anti-ESG measures, ranging from statements from state legislators to divesting of ESG-oriented asset managers from public assets. In fact, as I have been saying many times over the past few years, Storebrand itself can be applauded for its ESG sensibility in 30 states and be reprimanded for it in 20 others.
Moreover, the regulatory developments have not been so promising either. The Trump administration’s rule change regarding the consideration of ESG factors in public pension investing muddied the viability of ESG investing in the US. The rule change has been overturned with President Biden’s arrival, but it remains vulnerable to a future administration change. When we add the attacks of academics and other media personalities into the mix, it is safe to say that being involved in ESG investing has been both engaging and challenging.
Hopeful changes on the horizon
2023 has offered some glimmers of hope for the future of ESG investing, though.
On 21 September 2023, a federal judge in Texas dismissed an action that brought together more than 20 Republican state attorneys in challenging the most recent Department of Labor rule favoring ESG investing. The court reiterated the Department of Labor thinking that ESG factors might have a direct relationship to the economic value of investments and confirmed that the consideration of ESG factors does not preclude the consideration of financial benefits. In fact, the court acknowledged, failing to consider ESG-related risk-return factors could constitute a violation of the duty of prudence in some circumstances.
While the state attorneys filed an appeal, the decision from a traditionally conservative leaning judge still comes as a promising development for ESG-oriented investors. This might be the beginning of the end for the ideological polarisation in the US against ESG investing, pending the results of the upcoming presidential election.
The second development is the historic Inflation Reduction Act (IRA), which filled its first year this past August. With almost 370 billion USD in subsidies committed to building climate resilience, it represents the biggest investment for clean energy and transportation in history. Focusing on the production of EVs, solar and wind energy capacities, heat pumps, as well as grid upgrades, the IRA, in connection with its sister legislation the CHIPS and Science Act, promises the creation of more than a hundred thousand jobs. All considered, the IRA seeks to bring America back to the climate fight, and to a position where it is leading the pack.
Of course, there have been some well-deserved critique of the IRA. In dissecting the American transition trajectory from the rest of the world, the US has been criticised for turning global energy transformation into a zero-sum competition between nations, for kindling a subsidy war with and within Europe, for disregarding the role of China in the transition, and even for failing its foundational premise of reducing inflation. We should not turn a blind eye to these criticisms, as they might be hitting the right chord regarding the necessity of global collaboration in transition. However, I want to focus on how the IRA might be contributing to calming down the anti-ESG backlash in the United States.
When we look at where the IRA jobs are created, we see that it is predominantly the so-called Red states that reap the benefits of the IRA. According to FT journalists Sonja Hutson, Sun Yu, and Amanda Chu, more than 80 percent of manufacturing projects under the Act has gone to states that are current or historical strongholds of the Republican party, including Arizona, Ohio, Michigan, and Georgia. In claiming to re-industrialise the American heartlands, the IRA is in fact creating a new “battery belt,” where these Red states compete to become national and even global leaders of renewable energy production, employing thousands of people. Given that these are the very states that vehemently opposed the passing of the IRA, the legislation makes a strong statement regarding what it can offer – even to the most fervent opponents.
The IRA marks a vital acceleration point for the US journey in green transition. It can unblock the wheels much needed for bolstering global green transition, and which have been stuck in a polarised political discussion for the past couple of years. Getting a business- and innovation oriented context like the US, which is the largest financial market and the second largest emitter of carbon in the world, on board with sustainability means a lot to our global transition pathways, even if the particular legislation can vastly be improved.
The IRA also demonstrates that the anti-ESG backlash is not about what ESG investing is seeking to achieve in the real world. Rather, it is a contestation over its narration: Opponents of ESG investing employ a narrow perspective on investment risks to appeal to their electorates. They frame ESG investing as conflicting with the interests of people who are reliant on our fossil-fuel-powered economies. In that framing, ESG investing means plight for the masses. But the problem here is not ESG investing. It is to be able to create a transition pathway that is not leaving any group of people behind, which requires governments, investors, companies, and civil society to work together. ESG investing is not the problem. Its narrow framing as putting money into elite projects and stripping the people of their standards of living is.
A much-needed brand-new equilibrium
These promising developments do not mean critique of ESG investing is done and over. On the contrary, it should inspire a deep thinking about our ways of operating. How can a concept that appears so commonsensical and healthy to us be so outlandish and vicious to others? What are we doing wrong? How can we make ESG investing less susceptible to these kinds of easy yet vicious attacks? Is all this a matter of time perspective?
As it is right now, ESG investing seems to be a “flawed catch-all, trying to encompass too many issues in one marketable acronym," as declared in a recent Financial Times editorial.
We should have a good hard look at ourselves and what we are doing to make ESG investing more resilient into the future. And that, in my thinking, involves finding a new equilibrium.
The new equilibrium necessitates investors, companies, and governments to rethink their way of being and working, coming up with clear goals and even clearer methodologies. For governments, there are a lot of lessons hidden in the IRA experience: Government support for clean energy and transition should be more meaningful. It should respond well to the needs of corporations. This may well mean better deals for energy infrastructure. It can also mean regulation that is better designed to level the playing field and streamlined administrative processes.
Investors have some pressing tasks on deck as well: First, they should be more articulate about how integration of ESG factors result in better returns in the long run. Second, they should recognise the dilemmas that come with ESG integration. We will see many ESG dilemmas unraveling in the future, where different understandings of what is good for stakeholders will clash.
We are already seeing a few, like with the Norwegian government’s recent decision to open its continental shelf to deep-sea mining or Tesla’s refusal to allow collective agreements in its repair shops in Sweden. Finally, investors should be better team players when it comes to corporate engagement processes. Engagement activities are more likely to succeed when there is coordinated effort on the part of investors.
Glimmers of hope – for when it is 30 years from now?
Where others see discouragement, I see three hopeful developments for investors:
- First, there is now a wider recognition that ESG integration is relevant and even necessary for long-term risk-adjusted returns.
- Second, it is now widely accepted that ESG integration is creating additional value for the clients – value beyond return. And that is much appreciated by clients.
- Third, we are seeing improvements in the transnational regulation that allow further flourishing of ESG investing. We have seen it with COP15, where the historic Kunming-Montreal Global Biodiversity Framework was agreed upon, and we are seeing it with COP28, where another landmark agreement about transitioning away from fossil fuels was accepted. These are promising developments for ESG investors. We now need national legislation and regulation to tangibly bolster sustainable investments in this vein.
