Have we reached peak ESG?
Fears of greenwashing and anti-ESG bills in US states are causing investors to downplay their non-financial performance credentials. Is this the beginning of the end for ESG?
Fears of greenwashing and anti-ESG bills in some US states are leading some investors and companies to play down their non-financial performance credentials. Is this the beginning of the end of ESG?
As several states across the US have enacted legislation that bar investors from including non-financial factors in their decisions about where to deploy capital, the backlash against environmental, social and governance (ESG) considerations seems to be in full swing. The situation is not helped by the fact that many well known companies have been called out over recent years for greenwashing, making sustainability claims not backed up by evidence.
This, according to some investors, is leading to a new phenomenon. “We are seeing some companies and firms engage in greenhushing,” says Joana Castro, Head of Primaries and ESG at Unigestion. “They are understating their green and/or social credentials because they fear public scrutiny.”
They are understating their green and/or social credentials because they fear public scrutiny
“Greenhushing is definitely happening,” agrees Peter Dunbar, Principal, Responsible Investing, at StepStone. “I have seen and heard of ESG or responsible investment pages on web sites being buried or taken down. The language being used in fundraising or marketing is also changing in some instances.”
Rowing back?
Yet that doesn’t necessarily mean that investors or companies are conducting an about-face on ESG – for now. “I have heard of investors changing their investment strategy and choosing not to invest in upstream oil and gas, for example, but they haven’t disclosed that publicly” adds Dunbar. “They are no longer investing there for a whole host of reasons, but they are not disclosing that.”
So if practice isn’t actually changing, should investors be concerned? Yes, according to Anna Follér, Head of Sustainability at AP6. “If greenhushing continues, it will be negative,” she says. “We will not get the information we need to take the right decisions. For our fund, ESG is an integral part of our analysis and investment decision-making, along with other key information, such as performance, organisation and team.”
It could also lead to shifts further down the road. “Greenhushing is a risk,” says Cornelia Gomez, Global Head of ESG at General Atlantic. “ESG teams sometimes already lack visibility and resources. If they become out of sight, they become out of mind, too. If you don’t talk about what you are doing, you are not committing, taking the organisation along with you, or having discussions at the right level of leadership. It’s great to be doing something, but are you doing the right things and are you doing enough?”
It’s great to be doing something, but are you doing the right things and are you doing enough?
Digging deeper
All this may suggest that conversations about ESG and actions to implement initiatives will fade over the coming years. But scratching beneath the surface may, in fact, reveal a different story.
On greenwashing, for example, there are signs that companies have learned from some of their mistakes. While this may not be the case in all accusations of greenwashing, some false claims have resulted more from a lack of communication within organisations than a genuine desire to mislead. “GPs have to be careful to avoid unintentional greenwashing,” says Marina Leytes, Director at 57 Stars. “That can happen when the communications, IR, deal and compliance teams aren’t communicating effectively with each other. All efforts need to be co-ordinated to make sure you are not putting out claims that are not 100% accurate – you need defensive, thoughtful processes.”
It’s a point that Gomez also picks up. “We sometimes see organisations greenwashing without knowing it,” she says. “That’s because there is a disconnect between the experts who may be way down the organisational structure and the CEO.” Yet some have changed the way they communicate internally. “We see merchandising and marketing teams now follow a process of speaking to the ESG or sustainability teams before issuing reports or making claims in advertising, for example,” adds Gomez.
Embedded practice
Yet there are other signs that ESG is not going away any time soon. The main one is that companies and firms - especially in Europe - are either integrating ESG into their processes or have already done so. And often that’s not necessarily because it’s the right thing to do, because some LPs are demanding this, or even because European regulations are moving investors and companies in that direction. It’s often at least partly because they believe that solid ESG and sustainability practices will generate higher returns. “For many GPs, ESG is now part of their value creation strategies – that is the new normal,” says Britta Lindhorst, Managing Director and Head of European Investments at HQ Capital.
She adds that her firm ranks GPs according to ESG. “We’re seeing increasing scores among European funds,” says Lindhorst. “The average ranking in the US is lower, but it’s improving. It just needs time and education so that GPs see that ESG is part of an overall value creation strategy that will make companies more valuable.”
There is also a growing sense that much of what falls under the ESG umbrella is just part of being a prudent investor. “A lot of the topics that you would look at in due diligence are good ESG practice anyway, such as energy efficiency,” says Enrica Dacomo, Investment Research Director at Capital Generation Partners. “These topics generate value and it’s more a matter of how you report them and what story you tell. Often, it can be more about systematising than doing something entirely new.”
Linking back to returns
Overall, greenhushing is not a positive development for ESG, but one potential upside could be a greater focus among investors and companies on demonstrating more clearly the financial impact of sustainability initiatives. “The backlash against ESG can be problematic for GPs as they need to navigate what kind of information they provide to investors,” says Follér. “But a potential side effect could be that that it leads to them being more precise about what they mean in their ESG approach and how it generates value. I’ve seen some 2023 ESG reports, for example, where ESG integration is closely linked to financial performance.”
And this could be helpful in moving the conversation on because it neutralises the argument that investors face a binary choice between ESG and financial returns. Investors and companies increasingly have the tools to be able to measure, manage and report back on ESG, which means they should also be able to articulate and demonstrate where these intertwine with financial performance. As Dunbar says: “We definitely need to get better at explaining what ESG is and isn’t. Ultimately, it’s about trying to be better investors.”
We definitely need to get better at explaining what ESG is and isn’t. Ultimately, it’s about trying to be better investors.
