ESG might not last, but E, S and G aren’t going anywhere

The separate investment categories of environmental, social and governance are unlikely to go away regardless of what moniker they will collectively or separately fall under in the future, writes Virginie O’Shea, founder of Firebrand Research.

The ongoing industry debates about the ebbs and flows of environmental, social and governance (ESG) investing have led to a lot of interesting speculation about the future of the investment strategy over the last 12 months. But whatever the eventual outcome for ESG, there are many reasons why sustainability, diversity, governance and climate risk will remain important topics for the long term. I mean, have you seen the weather out there lately?

The industry focus on ESG isn’t just about investment trends, the impact of climate change on the environment is something that has permeated the consciousness of multiple generations. Governments have committed to targets and firms are on the hook for key changes to be made by set deadlines to address the rising temperatures. This year, we’ve seen record-breaking temperatures across many countries, which have resulted in floods, fires and droughts, to name just a few of the direct impacts to human life. Financial institutions and governments need to address the rising threat of climate risk as well as encourage positive movements toward sustainability.

On the S front, diversity and inclusion topics have changed the way we evaluate the industry and the way we speak about ourselves and to each other. Whatever your views on these changes, you can’t deny they’ve happened (albeit not in equal impact everywhere). Much more transparency and accountability is being built into board and executive reporting and governance, bringing the G into focus. To this end, the Securities and Exchange Commission (SEC) and the European Securities and Markets Authority (ESMA) have both altered corporate governance regulation over the last couple of years to increase shareholder transparency and to increase voting participation, and more is yet to come as part of initiatives such as the Capital Markets Union.

Moreover, the current and next generations of employees within banks, brokers and asset managers will have an even greater impact on the behaviour of capital markets firms as they climb their respective corporate ladders. Likewise, employees within the corporate sector will increase pressure on their firms to address diversity and sustainability, even those in the supposed anti-ESG, sin sector. The governance aspect of ESG is all-important as a catalyst for change as firms will be held to account by both their employees and their shareholders.

The post-pandemic great resignation has increased competition within the sector for talent, forcing many firms to re-evaluate their public image and their approach toward recruitment. Yes, some banks have gone back to an old-school, work-from-the-office approach, but many have not and are pitching themselves as more socially aware and environmentally conscious in a bid to attract the younger generation. Many are also actively trying to reduce their carbon footprints by cutting down on international travel too.

I’ll be chairing a debate on the topic of ESG at this year’s Sibos and I’ve spent a good part of the year conducting various exercises with clients about the various industry outcomes for ESG over the next 10 years. It should be a lively discussion as we touch on the impact of the next generation on ESG and beyond. But remember, even if ESG turns into E, S and G as separate investment categories or they change in moniker altogether, the drivers underlying their popularity are unlikely to go away.

For any Sibos-goers: “Green, clean, and ESG: Rewiring capital markets for a new generation of responsible investors” is on Wednesday at 12pm CET.