Investing Question: Is ESG Dead?

Welcome back to The Deal Room, a new week, but part 2 of a mini-series on ESG. And if you haven't checked out episode 1, just scroll back on your podcast platform. We covered everything from what is ESG, different investment strategies, how it differs from impact investing, and lots of other good stuff. But in this one, we are going to address the big question: is ESG dead? And definitely, you know, you think about the record outflows of ESG funds more recently. Is this a sign of disillusionment or a reset after years of hype? So not only that, we're going to dive into this and talk about, you know, is making money— is not a zero-sum game. And a couple of little closing things to think about from a potential career perspective as well. So Steven, is ESG dead?

Is ESG dead? That is a, well, that's a multi-trillion-dollar question. If you listen to the last episode, depending on which area of the world you look in, yeah, ESG could either be a $3 trillion assets under management industry or a $50 trillion. Definitely tune into episode 1 to find out a little bit more about that, but this Episode, we are going to talk about what's happened over the last couple of years. And if we were tuning into this podcast 3 or 4 years ago, the concept of ESG being dead, I mean, that just wouldn't be a thing. ESG was going absolutely great guns in a low interest rate environment. Biden in the hot seat, sustainability on the agenda. But I'm just going to start with a few stats and a few headlines to get this kind of conversation going. Then we'll try and explain why there's been a, you know, a turning away from ESG. And then we'll finish this podcast by actually asking the question, is ESG actually now more important than ever? But I've got a couple of charts in front of me, one of which says it's not easy being green. And basically there's two, it's a bar chart. The orange bar is fund launches and the yellow bar is fund closures. And all the way from 2020 to Q4 2023, there has been many more fund launches than closures by an order of magnitude, right? In Q3 2021, there were over 300 ESG fund launches and only about 20 fund closures. That was really peak ESG. Now, if you fast forward to Q1 2024, it was the first quarter ever where there were more closures than launches, about 60 closures, about 55 launches. So you're thinking, all right, this momentum is really, really slowing down and it's actually possibly going into reverse. I'll give you a few more headlines to kind of back that up. So BlackRock, obviously the world's biggest asset manager, BlackRock quits Net Zero Asset Managers initiative, 10th of January, 2025. And you would've seen this in a kind of post-Trump winning the presidency world. Big asset managers obviously following the money and following the trend as opposed to following their relatively skewed moral compass. Have decided, all right, we know what Trump's all about. It's drill, baby, drill. This net zero stuff was good in the low interest rate times, in the Biden times, but it's no longer fit for purpose. And I think the FT came up with a similar headline that really sums it all up. This was actually from the 9th of June, 2024. So about 9, 10 months ago, the unsustainable hype around ESG. So everyone has, everyone has started to realize or started to think that ESG is this kind of hypey, frothy kind of marketing-focused, potentially greenwashy industry that when times get tough, you know, what's the point? Like, ESG doesn't really mean much. Let's just focus on making returns for our limited partners, for our investors. And focus on doing what we do really well, which is making money.

So we touched on something before, which I'd love to get your opinion on, which is this difference between US and Europe. And why do you think that Europe remains more committed to ESG than the US? Is there cultural differences? You mentioned Trump, but is there regulatory differences that exist in those different geographies which make it easier in Europe? Or does that all crystallize with whoever's in the administration really dictates the policy agenda?

It's a, gosh, it's a really good question. It's so multifaceted. I'll start with a stat. Again, I'm looking at one of my charts, global ESG allocation and the change in allocation year on year for ESG assets under management. The only country over the last 2 years which has decreased their assets under management for ESG is the US. Europe is still going relatively great guns, not quite so much as in the, in the halcyon days of 2020 and 2021. But still, you know, they care about ESG. There's a number of reasons, right? That maybe we can split it into regulatory, political, and maybe more social. So regulatory. There's a lot more regulations out there in Europe about the disclosure-related regulations, taxonomy-related regulations, so that you have to define and assign different areas of your portfolio to different sustainability weightings. And again, there is a kind of degree of taking this seriously and putting some regulatory guardrails behind it. That's backstopped, by the way, by a slight nuance in the legislation around the fiduciary duties of directors. So in the UK, the fiduciary, i.e., the kind of legal responsibility of directors, is to protect and support the shareholders and to make money for the shareholders, put their interests right up at the top. But not at the expense of other stakeholders. That is the fiduciary duty. So you've got to consider all stakeholders. That second part, not at the expense of the other stakeholders, doesn't exist in the US. So for a kind of money-making— the argument in favor of just going out and making money in the US is, well, it's my fiduciary responsibility to do this, right? You know, there's nothing— I have to do this. For the benefit of my shareholders, I have to do this because that's what legislation, that's what the director's code tells me to do. And then obviously, you've got this political thing, the political hot potato, which is Donald Trump, anti-DEI, drill baby drill. If you kind of lump, and we spoke last week on the podcast about the amorphous nature of ESG, and the fact that it's very multifaceted, 3 different things bundled together into this phrase ESG, you know, take the DEI, diversity, equality, inclusion, that gets lumped into ESG. Take green finance, net zero, that's lumped into ESG. So a couple of the big bugbears of Donald Trump are really, really aligned to ESG. And by the way, some of the top performers under Donald Trump, as we covered in the two-parter on companies that have been successful as a result of the Trump presidency, things like prison industrial complex, things like military industrial complex, which are about as anti-ESG as you can get. So if you take these different factors, you can see the divergence between the US and especially Europe.

Is there any conceivable path to depoliticizing it then?

Yeah, it's a really, really tough one, isn't it? I think there was a time— this goes— this is, this is pure politics, right? So as we have moved further and further apart in the US, I'm talking specifically here about the US, we can— there are parallels here in Europe, but the US is the most extreme example of polarization. Back in the early '90s, the early to mid-'90s, If you looked at Bill Clinton and if you looked at Tony Blair and you took away the, the red of Tony Blair and the blue of Bill Clinton, you wouldn't really know whether they were Democrat, Republican, Labour, or Conservative because the center ground was all-consuming. And these types of issues were necessarily depoliticized because the center kind of owned the political mandate. Whereas now. Because we are so polarized, anything considered to be— and this is mainly in the US, can happen in the UK— anything that has even got a whiff of kind of Ivy League institutional DEI, caring for the planet, dot, dot, dot, gets kind of tarred with a certain audience. And anything that is, alright, individual freedoms, making money, going it alone, that's on the other side. So I don't, I can't see a way at the moment, especially as in the US, you know, the judiciary, the executive and the legislature are all so intermingled and very much on the right at the moment. I can't see a way through.

Perhaps time. Time is a great healer.

Maybe time.

There's a word obviously that we have to talk about because it gets mentioned a lot within this ESG topic, which is greenwashing. And I just wonder whether You could tell me how investors distinguish between genuine ESG efforts and greenwashing. Is there enough transparency on these types of issues to really differentiate between the two?

Yeah, this is, again, it's a really important one. And greenwashing, I mean, this concept of pretending to be more sustainable than you are, has transcended both businesses and asset managers. And I want to bring a case study to really illustrate the point of just how hard it is to actually trust what people say. So DWS, the asset management arm of Deutsche Bank, they were raided back in 2022 by German police and basically saying, look, you know, you said that on your fund prospectuses that you were integrating a load of ESG criteria. But actually, we're raiding you to look at your processes because we don't think you are. This is called prospectus fraud. And actually, fast forwarding 3 years to about 2 and a half weeks ago, Deutsche Bank's asset management arm, DWS, was actually charged €25 million for greenwashing and negligent infringement related to its ESG-related marketing statements, documents, and control processes. So this thing does have teeth. The problem is, much like with, much like with a lot of crime, you might catch one, but it doesn't mean you stop the problem, right? And it is so easy, that fine line between boosterish marketing and downright lies, that gray zone that a lot of companies and a lot of asset managers try to get on the right side. It's really, really hard. And if you're going to do this thing properly, i.e., be a really good ESG/impact investor, you're going to have to spend a lot more time due diligence. You're going to have to really get under the skin of the managers that you are investing in. And obviously as a retail investor that doesn't have that kind of time, you're a little bit playing blind and you're kind of relying on brand awareness and things like that. But DWS was a pretty established brand in the asset management world. So it's really, yeah, again, greenwashing is a massive challenge and it is a reason why ESG has been so undermined over the last 2 or 3 years. Are you even doing anything that is benefiting anyone? Are you just marketing? Is it just a picture of a solar panel on the front of your prospectus?

Well, yeah, I'm trying to curate the perfect YouTube thumbnail for this episode. You know, there's a few turbines in Steven.

So yeah, and there's, and just to kind of finish this piece off, there's one more reason that I'm not sure I put in my notes that I really, really want to cover in terms of this post-Trump or kind of post-polarized world as to why maybe ESG, the wheels have come off and you would've come across this, and I don't know if you remember a couple of years ago, BlackRock got sued in Texas for some of its funds not being able to invest in fossil fuels companies. I don't know if you remember that. There was, and this actually prompted a whole slew of states basically saying, look, if you're an asset manager and you are barring certain companies from investment, that is not allowed and we are going to lock you out of being able to manage money in this state. So this was, you know, again, it was 2, 3 years ago. I've got a, little photo of Ron DeSantis in front of me. He says that the legislation that I signed today, it's a few years ago, will keep windmills off our beaches, gas in our tanks, and China out of our state. We are restoring sanity in our approach to energy and rejecting the agren— the agenda of radical green zealots. And this led to this kind of anti-ESG legislative movement And actually, again, Larry Fink of BlackRock was just like, look, you know, back in 2020, I mentioned sustainability and ESG 100 times in my annual state— in my annual report. Now we're going to use it zero times because we don't want to get blocked out of pools of capital. Right.

So we've talked about so far a lot of challenges that are being confronted. So perhaps now we could flip take the other side of the table. And I remember from just previous Deal Room episodes when we've talked about this topic or in and around it, you've talked about something called antifragility, and we are living in a very volatile world as far as the first quarter of this year. So is actually, all these things aside, is actually investing in this type of area actually more important than ever?

Yeah, I mean, absolutely 100% ESG done well. Impact investing, i.e., long-term private market project finance, venture capital done well, is needed far more than it's ever been needed before. A, as an effective counterbalance to the contemporary political landscape, right? You need, you need, you can't just go completely roughshod over the last 15 or 20 years of really positive regulation, allocation, decision-making from, you know, the big money managers of this world. And I think it's quite dangerous in the world of asset management. We'll go on and talk about Antifragility in a minute, but I think it's quite dangerous in the world of asset management to be too knee-jerk in your reactions, right? So kind of being tossed around by every piece of volatility or every executive order that gets signed or withdrawn or whatever it might be, it's not necessarily going to boost your credibility in the long run. And whenever I'm teaching corporate finance, I say, look, this is a long game. You can get the quick buck, but if that compromises your reputation, you're screwed in the long term. And it's the same with asset managers. Pension funds put their money with asset managers for for a generation, for generations, right? So let, I would be very wary of asset managers who have decided very quickly to wind back on all of the stuff that previously they were touting as incredibly worthwhile, both from a societal and environmental perspective, but also from a financial perspective as well. And I'm going to give one example. This is great. It's super, super recent as well. So the People's Pension, this is in the UK, People's Pension, big pension fund, has pulled over $25 billion of investments from State Street, the large US asset manager, over sustainability and ESG concerns, passing funds over to Amundi, the European asset manager, and Invesco. So just to give you a stat on how State Street has shifted away from ESG. So in the first half of 2025, Again, first 3 months, State Street Global Advisors reported that it had supported 6% of environmental and 7% of social shareholder proposals. So this is kind of shareholder activism. This is a 14% decrease from 2023 and a nearly 50% decrease from 2022, right? So State Street's reading the US mood music and really dialing back its kind of pro-ESG shareholder engagement type stance. But what's that doing? Well, it's alienating a lot of investors that actually still believe in this stuff. So again, maybe there's a kind of wider lesson here. Don't react too quickly. Let's wait to see how things play out, and it might actually be more beneficial if you You know, put your line in the sand and just go, this is what we want to do. And I know that things might be a little bit tough in the first, you know, over a year or two, but we believe in this stuff. And they would've kept the people's pensions, $25 billion if they had done that.

Yeah. I think just generally the nature of talking about this on this type of podcast forum, we are always thinking about investing, but typically your mindset always goes to short term and you've just talked about a lifetime's worth of earnings. So over that period, the long run, yeah, it's totally different ballgame for sure.

It's totally different. And yeah, and maybe we should move on to this anti-fragility point. And I really like this concept and I, and as you mentioned, I've spoken about it before. I think one of the best ways to describe anti-fragility is imagine being a sapling, a tree. A tree only thrives when there is wind to make the tree stronger. If you put a sapling in a big greenhouse with no wind, the sapling will die. So it's things that thrive through stresses. And the best thing you can be as a company, and actually as a person to an extent, is antifragile. Really like, okay, the going is getting tough, things are getting volatile, but we are on this. Like we have got the systems in place, we've got the governance structures in place, and we know that in times of volatility, we're actually going to get stronger, and we're going to get better. And weirdly enough, lots of ESG companies, whether they are companies that have got extremely good policies towards their employees, i.e., they are going to retain their employees for longer. And that is a very good thing in this volatile, this very volatile world. They have got extremely good relationships with their suppliers and robust supply chains, extremely important in times of volatility and fragility. And they produce stuff that is going to be not necessarily more in demand as a result of all of this volatility, but certainly resilient. So again, from a European perspective, lots of clean energy firms, lots of renewable energy firms are actually you know, starting to perform quite well. Now, this all lends me to my kind of final point, which is investing to do quote unquote good, and to make money is certainly not a zero-sum game. You can do both. It's not an either or. There are trade-offs, there are tensions, you know, there are short-term benefits for long-term drawbacks or long-term gains for short-term drawbacks. But you, you, it is not a zero-sum game. And I'm looking at a chart in front of me that's showing over the last 18 months, low ESG risk portfolios, ROI in Europe, 10.6%. High ESG risk portfolios, ROI in Europe, 6.6%. So low ESG risk funds have outperformed high ESG risk funds by 4%. That is consistent across the US. That is consistent across Asia. And actually, if you look at the S&P 500 versus the S&P 500 ESG, weirdly enough, well, not weirdly enough, ESG outperforms over a longer period of time. So I, you know, This is just— this is definitely not an either/or. And if you can create that wonderful win-win-win, where you're like, okay, I've created— especially if you've got an entrepreneurial mindset, I built a company where, you know, by selling more of the stuff that I sell, I get to benefit more of the environment, and I get to benefit more society. So the more profitable I become, the better it is for the world. You know, that's that virtuous circle that we're all striving for. And that's not a trade-off, right?

Question to conclude. Where should people go then to explore further? Hopefully this mini-series has kind of sparked interest, uncovered a bit more depth of subject for people to have a better, more informed understanding. So if I'm a young person going, right, I found this really interesting. What's their recommended next steps to try and find out more about A, the subject, and B, some of the routes to some of the roles that you've spoken about? I know you mentioned perhaps going to banking first and then looking to take latter decisions, but any resources and things like that as well?

Yeah, so there's obviously a ton of books, right? And what we can probably do is we can probably post a few of the top thinkers in this space. Sometimes their books are good, sometimes their books are a little bit fluffy, But there are some really, really good authors, some really, really good professors, the likes of Colin Mayer, Bob Eccles. There's some really good people out there that we should be driving you towards. I think this is one that requires quite a lot of, quite a lot of reading, quite a lot of thinking, quite a lot of maturing in the way that you think about these things. And one thing that I would do, talk about careers in a second, one thing that I would do in side by side with doing some good old-fashioned reading is I try and pick like 20 companies at random and try and figure out for myself with the information that is being given to me whether I think that this company is net positive or not. Right. And that will, you know, let's take Meta for example, as one that I have a very clear opinion on, but you know, you can go through all of the ESG ratings. You can go through the sustainability report. You can really think deeply about the different stakeholders that it's affecting and figure out whether you believe that this should be positively or negatively aligned to the impact areas that you care about. And you might want to do the same with a company, a mining company, right? Rio Tinto. It's obviously, it does some pretty bad stuff. It does some pretty harmful stuff, but it's created If we didn't have that company, we probably wouldn't have the copper to progress the electrification of our planet, of our energy system. So using real companies to get your thinking a little bit more refined and understanding that there is nuance and complexity in this stuff is hard. I would definitely recommend doing that. And then in terms of how you pursue your career, I think it's, you know, as I said, I think it's really, really hard to go straight into a pure sustainable investing role because so much of the fundamental principles of investing or the fundamental principles of investment banking with a view to maybe going into private equity, they are ESG agnostic, right? And you probably need to pick up these fundamentals. Like if I'm doing a, if I want to go into impact investing and I want to go into project management, well, 80% of that is still going to be, is this project viable from a financial perspective? And if I want to go into impact private equity, 80% of that, you know, you're still investors, you're still trying to make money. So I would still learn the basics, but not forget the reason why you're doing it. And if there are any sustainability committees that you can get on in your place of work, just to kind of build a few CV points, then I'd definitely do that as well.

Yeah, I was going to ask that. Is there any like CV add-ons that you could do whilst at university? But I don't, I don't think I've heard of a uni ESG society. Maybe there is and we just haven't encountered them.

No, I don't think I've encountered any. There are definitely sustainability societies, but it's, again, it's that annoying thing where you're like, You know, okay, the sustainability society's doing something like, you know, picking up litter or something like that. You're like, well, no, I actually want to do something a little bit more macro, a little bit more kind of analytical. So I'm sure there are societies out there.

Yeah. Reach out, let us know. We'd love to hear from you for sure. So Stephen, that was a really insightful, really interesting mini two-part series. If anyone would like to hear another subject matter covered in future, Steven and I are currently just putting a few brainstorming sessions together over the summer of some content to release over a similar type of more explanation type format, trying to really demystify some of these subject matters. So yeah, drop us a comment, whether this is on YouTube, on Spotify, wherever it is, LinkedIn, let us know. Otherwise, Steven, thank you as always and have a good week.

Yeah, thanks, Anthony.