Is greenhushing killing ESG and impact investing?
Is the threat of greenhushing and greenwashing threatening recent years embrace of increased sustainability practise?
The number of funds integrating environmental, social and governance factors into their investment processes has risen dramatically over recent years, as has those embracing impact investing. But are these practices and strategies now threatened by a backlash against greenwashing and a politicisation of investment decisions?
Once niche pursuits, the integration of ESG into investment processes and impact investing have gone mainstream over the past decade.Among the flurry of funds raised in that time claiming to have a positive impact on environmental, social and governance outcomes, there were undoubtedly some that stretched the truth, leading to accusations of greenwashing.
Yet the situation today suggests the pendulum has swung right back, as funds fear being called out for greenwashing, and as recent US legislation in some states has effectively outlawed investors from considering ESG factors when deciding where to invest. What we’re now seeing is greenhushing, whereby some funds downplay their ESG and/or impact credentials.
“Funds are being cautious about what they say publicly,” adds Peter Dunbar, Principal, Responsible Investing, StepStone. “Websites are being rearranged with ESG or sustainability being pushed back a couple of levels or ESG is being renamed.”
So what effect is this having on ESG integration and impact strategies? Will they be consigned to the history books? GPs and LPs offer their view of what comes next.
It’s a question of trust.New technologies that improve energy efficiency, energy storage solutions, the conversion of fossil fuel-dependent businesses to clean energy sources and – perhaps further down the line – the emergence of green hydrogen are all attracting investor interest, in particular as governments and policymakers get behind the decarbonisation agenda.
Where will all the leaders go? One impact could be that firms stop collaborating to share best practice – ESG and impact has brought different players together in a way that the industry hadn’t seen before. As a result, greenhushing may lead to a slowdown of adoption or improvements in practice, says Dunbar. “Even if GPs continue what they were doing in the background and communicating with us one-to-one, greenhushing is negative,” he says. “That’s because the absence of public statements takes away the leadership and advocacy from the market.”
GPs may need to consider their investor bases carefully. With many European LPs requiring funds to invest with ESG factors in mind and some US investors taking a fundamentally different approach, GPs may well face competing priorities when it comes to raising and investing capital. “LP agreements on ESG may end up with statements that are mutually exclusive,” says Ethan Levine, Managing Director, CF Private Equity. “GPs need to create as much flexibility as possible, but ultimately, they may need to make a strategic decision as to how important investors with certain views are to them. It all comes down to the firm, its strategic priorities and how each investor will help them get to the level they want and achieve the goals they are aiming for. If an investor places limits on these, it might not be strategically aligned.”
The term ESG may disappear…
“Never have three letters caused so much enthusiasm, so much confusion among investors or, more recently, so much division,” says Eimear Palmer, Global Head of ESG, Pantheon. “It’s important that the industry refocuses and articulates well what it means. ESG as a term won’t be with us for that much longer. As an industry, we need to lean away from the term and lean into what people are actually doing – incorporating material sustainability factors into our consideration of risk and value creation.”
…yet many investors will double down on sustainability.
With regulations in Europe encouraging sustainable practices among companies and their investors, it’s unlikely that ESG – or whatever people choose to call it – will disappear. And for many firms, it has simply become part and parcel of investing. As Chloë Sanders, Head of Sustainability, CVC Capital Partners, says: “Sustainability is a key part of our fiduciary obligations. Our portfolio companies do not operate in isolation – we have to think about their role in society and the environment and we have to address the most material risks and opportunities that stem from that.”
“GPs need to create as much flexibility as possible, but ultimately, they may need to make a strategic decision as to how important investors with certain views are to them. It all comes down to the firm, its strategic priorities and how each investor will help them get to the level they want and achieve the goals they are aiming for. If an investor places limits on these, it might not be strategically aligned.”
The financial argument for sustainable practices will become clearer.Much of the resistance to sustainability and impact investing stems from a belief that these involve a trade-off in returns. Yet there are plenty of investors who believe the opposite and so we can expect much more work to demonstrate this point. “There is this flawed argument that impact investing generates a concessionary level of returns,” says Sierra Peterson, Founding Partner, Voyager. “It tends to focus on this idea of balancing returns with impact. Instead, they can be one and the same – you can create billions of dollars of savings if you optimise assets or slash energy waste. Doing more with less is just good business.
And, of course, there are no financial returns without exits. And here, many say ESG and sustainability have become increasingly important when it comes to selling. “ESG is increasingly a hygiene factor in M&A,” says Sanders.
“ESG could be one of the top three things that either accelerate and drive value creation or that kill a deal,” says Logan Allin, Managing Partner and Founder, Fin Capital. “In M&A, this is becoming increasingly important as buyers send detailed ESG questionnaires and conduct far more due diligence in these areas than ever before.”
Younger generations may further tip the balance. “We are on the cusp of a great generational wealth transfer,” says Palmer. “Around $18 trillion will pass into the hands of the next generation by 2030. They will expect much more from their investments – they want a positive environmental and social impact alongside financial returns.”
Even if GPs continue what they were doing in the background and communicating with us one-to-one, greenhushing is negative
Despite the trend among some investors to keep quiet about their sustainability credentials, there clearly remains plenty of discussion around ESG and impact. And while the differences of opinion that have emerged over recent times may give investors pause for thought, it seems unlikely that sustainability and impact will just fade away. “There is a divergence of perception and practice around ESG between the US and Europe,” says Levine. “But this is going to continue to be important globally. We will see investors demonstrate the value add and creation associated with ESG, although it will have to be navigated with some nuance.”
