Quantitative analysis using InferenceCloud’s technology shows that ESG investing is surviving an onslaught from critics – and suggests that the way forward is to tackle the perception of a conflict between taking this investment approach and maximizing returns. That may involve being willing to drop labels.
A casual observer could be forgiven for thinking it’s all over for ESG (Environmental, Social and Governance) investing. What started as a practical approach to risk management and valuation for investors has become a weaponized, contested and increasingly unfashionable term. Retail investors are pulling money from ESG-labelled funds and some asset managers, also concerned by increasingly rigorous regulation, are quietly dropping those labels.
The label, of course, is the problem – at least from a reputational perspective. It created a target that was easy to attack for those intent on taking up arms against “woke capitalism” in America’s culture wars. To cite one prominent example, Ron DeSantis, a candidate for the Republican Presidential nomination, called for “crippling the ESG movement” in a book he published earlier this year. As governor of Florida, he also passed legislation that bans, among other things, the use of ESG in investment decisions at the state or local level.
So the ESG acronym, suspiciously incomprehensible to many outside the corporate world, has enabled the projection of a movement. That helped its critics to prise ESG apart from its narrowly technical and financial origins to position it as an agenda. We’ve also noticed how it has become an adjective: “That doesn’t sound very ESG.”
The success of the ESG counter offensive has made many firms understandably cautious about using the term. So it might be surprising to learn just how relevant ESG remains to many investors – both to institutional asset owners and high-net-worth individuals – around the world.
The term more closely reflects the interests of these two audience groups in Europe than any other term when it comes to selecting an asset manager, show Insights from InferenceCloud, Ashbury’s AI partner. Zurich-based InferenceCloud uses a proprietary suite of AI tools to analyse large volumes of data from a wide range of news, social and other sources. We chose this specific audience and context to make this a focused example.
It’s a more nuanced story in Asia and the US, where the data shows that ESG is more distant from those audience segments than returns-oriented terms like alpha or performance. But ESG and ESG integration are still closer to the interests of Asian investors in this context than terms like climate risk, stewardship and sustainability (the latter often being seen as less controversial shorthand for ESG).
What does this mean?
This analysis may reassure asset managers that ESG is far from all over, in spite of the outflows and headlines.
Of course, it’s not surprising that European investors should be more favourable towards ESG. The European Union has some of the world’s most advanced environmental and investment regulation, such as the Sustainable Finance Disclosure Regulation (SFDR) framework and the European Green Deal. It’s equally intuitive that US investors should be less engaged with the topic because of the backlash we discussed, and that investors from Asia, where the approach to ESG regulation is at very different stages in different markets, should be more concerned with other factors.
However, we believe that these quantitative insights may also show that investors’ interests in the US and Asia may be closer to ESG than they seem. Again, it’s a question of labels.
The original promise of ESG metrics was that they would provide an additional set of non-financial indicators about companies to enable investment decisions that could lead to better risk management – and in theory returns – for a portfolio over the long term. For example, the potential for an agribusiness to be negatively impacted by declining crop yields caused by climate would not show up in its financial statements, but would nonetheless be a material factor for its business.
In other words, ESG was a tool for helping achieve the performance outcomes that the InferenceCloud analysis tells us that US and Asian investors prioritise, rather than the “ideological joyride” that Governor De Santis described it as. This connection has clearly been lost for many audiences.
The hard way forward
Returning to the starting point for ESG suggests that there is a way forward for asset managers who believe in the potential of non-financial analysis to enhance returns. In simple terms, it involves closing the gap between ESG and fiduciary obligations that critics have managed to open up. That doesn’t just mean showing there is no conflict between what has been known as ESG investing and maximizing returns; it means showing that ESG factors are part of how you maximize returns. This won’t be quick or easy.
As ESG investments boomed during the pandemic, it was simple to show that you could do well by doing good. Easy monetary policy, fund inflows and rising valuations created a positive feedback loop. Conditions have clearly changed since then, but sustainable investment returns are still keeping pace with those for broader markets. Up to the end of June, Morningstar’s US Sustainability index had returned 20.64% over the previous five years versus 19.25% for the US market as a whole.
The way forward involves increasing focus on explaining why and how taking into account non-financial factors enables greater value creation in this less benign environment. That could mean using data to show why certain non-financial metrics are good indicators of a stock or sector’s performance, for example, or highlighting how climate risk is already impacting the performance of some companies.
In Asia and the US in particular, this strategy may indeed mean dropping ESG labels and moving away from an emotive, values-based approach to marketing and communications in favour of one that is grounded firmly in the language of risks, returns and data. It is especially critical to demonstrate an empirical basis for your arguments when critics accuse you of being ideological.
Some may baulk at the idea of ditching ESG labels and emotive content. It may seem like abandoning the cause of climate action, or other ambitions under the UN Sustainable Development Goals. It may seem like inaction when the world desperately needs action.
We would argue that the opposite is true: it’s substance that matters, not labels. There is no point in sticking to positioning that doesn’t speak to investors’ priorities; that would only prove De Santis right. It’s better to show that taking into account ESG factors delivers what investors want and reposition this analysis of non-financial metrics as a key driver of returns. You don’t need to use the ESG label to tell this story, but the substance amounts to the same thing.
The big caveat, of course, is that the data has to stack up. If you can’t prove at some point that taking into account non-financial factors leads to better outcomes, then it may indeed all be over for ESG. This is obviously going to take time to discern, though. ESG is still in its infancy and evolving from an exclusionary approach based on screening out some assets to one in which non-financial factors are integrated into investment decisions. It is reasonable to use evidence to argue that a more holistic approach should lead to better returns, even if it will not be possible to prove that for a number of years, but no audience’s patience is infinite.
One final observation. The InferenceCloud research shows that active ownership is a highly relevant term for investors in Asia, Europe and the US. As outflows from ESG funds mount, it might seem like a stretch to suggest that the dreaded acronym could be a way for active managers to win back market share from the giants of passive investing. But using non-financial factors to make investment decisions in a nuanced way, based on expertise and proprietary methodologies, is clearly an area in which active managers prove the critics right.
This insight also suggests that there is space for asset managers to be relevant to investors by showing how active engagement with companies that may not seem to be “very ESG,” such as oil and gas producers, can lead to better returns as well as better environmental outcomes. Active managers have long found it challenging to talk about this kind of stewardship work because it is often confidential and the impact is hard to quantify, but the data suggests that doing so is worth the effort because investors appear interested.
A quantitative edge in reputation-building
We believe that using data and AI can take the guesswork out of communications and content strategy and lead to better engagement with all stakeholders and greater reputational value. That is why Ashbury is partnering with InferenceCloud.
InferenceCloud uses a proprietary suite of AI tools to analyse large volumes of data from a wide range of news, social and other sources. This enables it to generate nuanced and actionable insights into the relevance of different topics to different audiences, as well as to identify new opportunities to create relevant content.
Ashbury harnesses this quantitative analysis to design and implement more impactful content strategies for our clients. We add our award-winning strategic advice, financial sector specialisation and creative capabilities to deliver highly-targeted content that supports clients’ reputational objectives.
If you’d like to find out more, please contact us at
