Why We Should Be Advocating Against the Supposed ‘ESG Backlash'

Written by; Nigel Green | deVere Group CEO and Founder

This year, in investment circles, is being characterized by an ESG backlash, as critics of environmental, social and governance (ESG) investing within the advice industry become increasingly vocal in their approach.

The noise has grown even louder in recent months as the US - which has around 11% of ESG fund assets, witnessed outflows of $6.2 billion during the quarter four of 2022. 

The ESG cynics within the advisory community claim that those who champion this kind of investing are simply grandstanding and woke virtue-signaling. 

Some also allege that this kind of investing undermines or compromises essential government policy and action in the areas that it purports to support and is therefore resolutely unhelpful.

Meanwhile, others say that the very premise is flawed because if ESG investments are financially sound, then fund managers focused on maximising client returns already take them into account, so what’s the point?

All these views might carry a very small grain of truth, but not enough to be substantially accurate. 

I’m sorry to the naysayers, but there’s no getting around the fact that those companies that take their ESG obligations – and they are, in my mind, obligations – seriously are the ones that will demonstrably outperform.

Indeed, Bank of America Merrill Lynch research reveals that 15 out of the 17 S&P 500 bankruptcies from 2005 to 2015 were organisations with poor environmental and social credentials five years prior to their filing for liquidations. 

Also, it shows that significant ESG-orientated controversies were accompanied by peak to trough market capitalisation losses of half a trillion dollars for large US firms between 2013 and 2019.

It’s clear that companies with strong ESG credentials compete better with their peers in terms of related technology, innovation and regulation. 

In addition, they are more successful at recruiting and retaining top talent.

Although it is essential to welcome scrutiny and acknowledge that there may be valid criticisms of poorly implemented or inconsistent ESG strategies, I strongly encourage individuals within our industry to refrain from weaponizing or politicizing ESG investing by dismissing it as mere 'woke virtue-signaling' or using other derogatory terms. Such actions could lead them and their companies to be viewed unfavorably in the future.

The so-called ESG backlash is misguided and lacking in depth.

What’s truly warranted is a more informed and inclusive discussion about the performance and value of this investment approach. 

Indeed, as the climate change emergency continues to escalate, as we’re currently seeing with the extreme heatwaves scorching much of the northern hemisphere, financial advisors need to step up to play a vital role in addressing this global challenge.  

By recommending ESG-orientated investments, we can enable clients to make a meaningful impact while pursuing their financial goals.  

Championing sustainable investment: It is imperative for financial advisors to proactively advocate for ESG funds and sustainable investment opportunities that emphasize environmental stewardship, social responsibility, and robust governance. By enlightening clients about the advantages of ESG investments, we empower them to make informed choices that contribute positively to the well-being of our planet.

Evaluating climate-related risks: By integrating climate risk analysis into our strategies, we assist clients in navigating potential disruptions linked to the climate crisis. This proactive approach not only bolsters portfolio resilience but also safeguards clients' financial interests in an ever-changing world.

Having climate conversations with clients: Through encouraging open dialogue and delivering pertinent information, financial advisors aid clients in comprehending the financial ramifications of the climate emergency. By doing so, we empower them to make well-informed decisions that align with their core values.

Adopting innovation and technology: Utilizing data analytics becomes crucial in identifying ESG opportunities, enabling us to make informed and impactful investment decisions. By embracing fintech solutions, we can drive impact investing, directing capital towards projects that promote positive environmental and social outcomes.

Promoting collaboration for collective impact: As advisors, active collaboration with industry peers, asset managers, and regulatory bodies becomes imperative. By working together, we can develop best practices, share valuable knowledge, and collectively address the complex challenges posed by climate change. This united effort amplifies our impact and accelerates progress towards a more sustainable future.

I have full confidence that the contributions made by financial advisors are not only vital in combatting the climate change emergency. In today’s world, investors, especially younger generations, are going to be actively seeking to align their financial decisions with their values, despite what some in our industry may believe, and financial advisors should be wholeheartedly responding to this.

By leveraging our expertise and influence, we possess the power to drive a significant shift towards a more sustainable and resilient future.

Our commitment to sustainable investments, implementing effective risk management strategies, engaging clients thoughtfully, embracing technology and innovation, and creating collaborative efforts will undoubtedly have a profound impact in addressing the climate change crisis.

As financial advisors, we play a crucial role in guiding clients towards investments that align with their environmental and social values, thereby contributing to a positive change for our planet. Through our collective efforts and commitment to sustainable practices, we are actively shaping a brighter and more sustainable future for generations to come.

Related: ESG Is Dying Its Inevitable Death