On 23 February 2023, the Sustainable Trading industry network celebrated its first anniversary with a special event hosted by founder member organisation, Jefferies. CEO and Founder Duncan Higgins led a panel discussion featuring ESG and sustainability experts from the industry: Luke Sussams from Jefferies, Victoria Kelly from Fidelity International, and Simon Clark from Kaya Advisory. 

The panel focused on current perceptions and realities surrounding ESG, specifically in relation to growth in investor demand, shifting the narrative away from negative connotations of “greenwashing”, and what the future looks like for ESG and sustainable investment. 

 

Theme One: Growth of Investor Demand 

Despite some variation by region, particularly evident between Europe and the US, there is growth in investor demand for ESG products. The panel attributed this increased demand as one of the primary drivers of ESG change, underpinned by three key factors: 

Financial Materiality 

ESG factors are now recognised as financially material and falling within an investor’s fiduciary responsibility. Driven by fiduciary obligations to investors, at a minimum, fund managers must demonstrate an understanding of how their investments are impacted by climate risk and specific climate change regulation (such as the 2015 Paris Agreement), and in terms of human capital.Employees are also a growing influence of ESG for companies, increasing the pressure on businesses to demonstrate their ESG credentials, approaches and plans for future action.

Regulation  

The regulation of asset managers mandates consideration of ESG factors:  Europe – with SFDR disclosure obligations which aim to improve transparency and reduce greenwashing – is at the forefront of this agenda. The Corporate Sustainability Reporting Directive (CSRD), due to come into force in 2024/25, will also change the ESG landscape, as companies will have to think about their businesses beyond environmental and climate impacts and consider all three E, S and G pillars.

Demand from Asset Owners 

Capital flows to “Dark Green” or “Article Nine” products in Europe were positive for every month last year, a significant sign of the strength of demand for ESG products. This statistic becomes more poignant when considered in relation to the difficult year for equities markets. While the view is different elsewhere in the world, demand in Europe will likely remain high.

 

Theme Two: Negative ESG Narrative 

The panel discussed the diverse range of anti-ESG narratives that have emerged in response to the growing demand for ESG products. On the one hand, sustainability purists criticise ESG as a greenwashing, profit-driven exercise, while on the other, ESG deniers resist measures that may reduce efficiency and profitability, often associated with an anti “woke capitalism” agenda. Right-wing politicians in the US have supported anti-ESG movements to remain aligned with commercial interests in industries like oil and gas. The core argument against ESG falls apart, however, when confronted with fiduciary duties, and increasing pressure on companies to shift from shareholder to stakeholder value propositions, a transition driven by shareholder, employee, and customer demands. 

The panel highlighted the importance of learning from a spectrum of viewpoints, including ESG deniers and sustainability purists. Although conversations about taking necessary steps, and finding a balance between business and climate interests, can be challenging, valuable takeaways can be drawn from these discussions. Ultimately, those companies with the capacity to drive significant change will be the ones that embrace the transition from shareholder to stakeholder value. 

 

Theme Three: The Future 

Bringing the discussion to a close, the panellists were asked what the future will look like for ESG in the industry, and how to transform the negative narrative into a more positive one. The following key points emerged as vital to ensure the continued development of ESG in the industry: 

Ensuring Clarity of Communication 

It’s crucial for organisations to provide clear narratives about their own ESG strategies, what the strategies actually mean, and areas that need improvement. Addressing the issues you aim to tackle and outlining the steps to be taken in the short, medium, and long term provides greater transparency for employees, shareholders and the wider industry.

Engaging in Collective Action 

Collective action is always more effective than going it alone; working together to develop ESG standards of best practice enhances bargaining power and our industry ‘voice’ provides greater influence. This is particularly valuable at a time when regulators are themselves uncertain of what steps to take.

Focusing on Financial Materiality 

The language used when discussing ESG should be focused primarily on the financial materiality of E, S and G action (or inaction) – how a company’s activities might influence stakeholder decisions and create or erode business value over time – and less around the ‘ethics’ or ‘optics’ of taking action.