Long Read  

Does ESG have a future?

"Now, we’re seeing problems around ESG emerge, particularly with many organisations greenwashing – that is, paying lip service to it, rather than actually putting in real action to do better."

Gupta adds: "As businesses now face increasing scrutiny and scepticism over their tick-box approach to their ESG initiatives, how will this impact the wider ESG sector? Will investments now have to be more durable, and will ESG investments now need to actively strengthen and do what they claim to do? How will this be measured?"

Baig says even the term ESG "has not been helpful" for investors, as it is too generalised. 

He says: “The issue is that the range of options available to investors are far subtler than the name suggests. One can have an ethical fund, that is a fund which excludes certain investments, or one can have thematic funds.

"We have an environment fund, for example, and we have a social fund, and of course there are investments in the environment fund that wouldn’t make it into the social fund and vice versa. And we would not call either of those funds impact funds, as that is a different category again.”

He feels the lack of subtlety is disadvantaging the reputation of ESG as a whole. 

He says that right now, while flows remain positive into ESG sectors, “the pace of increase has slowed just as market performance has”, but he says he believes that the present underperformance of ESG-related equities is the result of cyclical factors in markets, namely the decline of growth stocks relative to value stocks, and the majority of the equities that would typically qualify as ESG compliant are growth stocks, particularly in areas such as renewable energy and emerging technology.

Thematic approach

Steve Kenny, commercial director at consultancy Square Mile, says the investment industry places a lot of focus on the E (environmental) in ESG, as this “is the one that is fashionable now, but it is also the one that is easier to explain. 

"It's a bit more difficult to explain or measure the S (social), and to be honest, most companies have been doing the G (governance) for years, and because they view that as normal, they aren’t very good at highlighting it, so all of the focus has been on the E.