Mar 28, 2024 - Energy & Environment

ESG down for the count, but not totally knocked out

Illustration of a sweaty leaf sitting on a stool in the corner of a boxing ring.

Illustration: Lindsey Bailey/Axios

ESG investing is dead. Long live ESG investing.

Driving the news: Released earlier this week, an analysis of the often derided environmental, social and governance investing trend paints a mixed picture of what some critics have denounced as "woke capitalism."

  • Pitchbook's "State of Private Market ESG and Impact Investing in 2024" notes that asset managers are retreating from ESG commitments — at least in public.
  • But it also found others are leaning into it as a method of "value creation and protection … in the challenging macroeconomic environment."

Why it matters: ESG has been one of the hottest, and most polarizing, investment trends of the pandemic era.

  • The global economy is undergoing an energy transition — or embracing "pragmatism," depending on who you ask — away from fossil fuels toward cleaner sources. That needs buy-in from Wall Street and corporate America to manifest a carbon-free future.

The details: Pitchbook's study found that programs were being downplayed in favor of more silent support for ESG (known as "green-hushing" in certain circles).

  • Additionally, the analysis cited the "extreme" political backlash — in combination with macroeconomic factors like still-high inflation rates —as reasons for asset managers to reconsider their stance.
  • "This is a significant departure from the rapid adoption and branding around ESG in the private markets that transpired at the beginning of the pandemic," the firm notes.

What they're saying: Marcos Carrington, CEO and founder of Environmental Stock Exchange (ENVX), counts himself among the skeptics.

  • Among other things, he believes the investing framework "will continue to see massive outflows and diminished returns in the coming cycles, primarily due to its failure to generate competitive adjusted rates of return, prohibits asset managers from maintaining their fiduciary responsibility and perceived hyper politicization."
  • "ESG is a qualitative construct created to influence behavior" that on various metrics, hasn't been "well-suited or adapted for investment in global financial markets."

Yes, but: So is the vaunted ESG movement completely flat on its back? Not quite, Pitchbook notes.

  • While the financial performance of ESG-centric portfolios and investments vary, "quantitative evidence that [its] use…necessitates sacrificing returns has not emerged," Pitchbook writes, noting different approaches and returns on investments.
  • "As such, determining how different approaches to ESG affect the financial performance of private funds has continued to be extremely challenging.''

Meanwhile, proponents of environmental and social investing are "leaning in," noting the potential for upside, Pitchbook's analysts noted.

  • Much of that is thanks to decarbonization efforts and the harder-to-ignore effects of a warming planet.
  • Survey respondents frequently mentioned advancing the energy transition and bolstering climate change adaptation and resilience "in connection with the ability to take advantage of government policies and spending," the analysis states.

The bottom line: ESG may be on the ropes, but it's not completely down for the count.

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