ESG: Bowed But Not Beaten

The ESG movement has seen a significant backlash recently. However, as Adrian Ashurst, CEO of WorldBox Intelligence, points out, government and public support for ESG remains strong and the movement will continue to exert a powerful influence over businesses in Southeast Asia and globally.

Environmental, social and governance (ESG) factors have moved into the mainstream over the past five years. Since 2022, however, criticism of the way companies and investors have embraced ESG has been growing. Russia’s invasion of Ukraine that year proved a catalyst for the backlash. The invasion exposed Europe’s dependence on Russian energy and drove a spike in energy prices and inflation that hit the poorer sections of society hardest. That caused many to question the wisdom of the drive to net zero. Energy security remained paramount, they argued – and that meant investing in fossil fuels.

As the UK’s Daily Telegraph reported in September 2023, politicians began backtracking on climate-change targets for fear of “being punished by voters who are feeling the pinch of surging food and energy prices”.

In the UK, the government postponed a ban on petrol engines in cars by five years, to 2035, slowing the switch to expensive electric vehicles. It also gave homeowners more time to swap fossil-fuel boilers for heat pumps.1

France said it would not be banning gas boilers in homes because that would be unfair on people in rural areas. Meanwhile, Germany approved a watered-down oil and gas “boiler ban” after months of outcry over the cost of new, greener heating systems. Germany’s best-selling newspaper, Bild, had campaigned against what it branded “the heating hammer”, the Telegraph reported. The legislation was amended so that it will now cut only about three-quarters of the polluting emissions it had targeted as part of Berlin’s push for net zero by 2045.

The war in Ukraine has also prompted criticism of the way investment companies shun the defence sector on ESG grounds. In March 2022, for example, shortly after Russia attacked Ukraine, the Swedish bank SEB made a U-turn on its decision a year earlier to adopt a new sustainability policy that excluded defence stocks from its funds. From 1 April, six funds were allowed to invest in the defence sector.

The EU also ditched proposals made in 2021 to label the defence industry as socially harmful.2 In September 2023, Grant Shapps, the UK’s defence secretary, said ESG considerations risked undermining the UK defence industry and urged ESG ratings providers to be clearer on their methodology.3

Mounting concern about greenwashing has also prompted government intervention in the multi-trillion-dollar ESG investment industry. Regulators and politicians in Europe, Asia and the US are determined to bring more transparency to how the ratings are derived, and are asking questions about whose interests they really serve, the Financial Times reported in October.4

The backlash against ESG has been strongest in the US. Florida Governor Ron DeSantis, a possible 2024 presidential candidate, signed a bill in May barring the use of ESG when investing public money. Other states have also introduced anti-ESG bills and have collectively pulled billions of dollars from funds run by BlackRock, which has championed ESG investing.5

Unsurprisingly against this background, and after years of very rapid growth, ESG investment funds have started to see outflows.6

Source: https://www.reuters.com/sustainability/sustainable-finance-reporting/esg-equity-funds-suffer-big-outflows-buffeted-by-market-jitters-us-backlash-2023-07-06/

Where does ESG go from here?

The backlash against ESG was perhaps inevitable, given that it grew so rapidly in such a short space of time. However, there are many reasons to believe that the ESG movement will not simply disappear but will be reformed. The focus of governments around the world on regulating ESG and preventing greenwashing should provide a new credibility to the ESG movement.

The emergence of artificial intelligence (AI) should also help, because of the immense amount of data AI can access and analyse. That should further boost transparency and legitimacy.

Moreover, public interest in the environment and other issues shows little sign of waning. Indeed, if anything, it is growing in Southeast Asia. Meanwhile, governments and authorities in Southeast Asia remain committed to tackling climate change.

In November, for example, the Malaysian central bank reported that “sustainable investments are gaining momentum in Malaysia with key investment themes built around the need for accelerating sectoral transition and climate resilience, such as the energy transition and the circular economy, food security, and mobility transformation”.7

Businesses across the region are also embracing ESG. In November, for example, Prudential Thailand Life Assurance pledged to put ESG issues into practice in every segment of its business. It is aiming to allocate 20% of its total portfolio to ESG investments.

In Vietnam and other Southeast Asian countries, government regulation is driving change. Hanoi has improved the regulatory framework towards ESG, introducing a national green growth strategy for the 2021–30 period and a national strategy on climate change for 2050, among other initiatives.

Globally, companies also remain committed to ESG. That’s according to a survey carried out by Bloomberg Intelligence in November, which found a strong commitment to ESG principles among investors and C-suite executives.

Adeline Diab, global ESG research and strategy director at Bloomberg Intelligence, was reported as saying: “ESG has moved from a fringe concern, to mainstream and finally, to a mandated necessity. We expect 2024 to be about ESG accountability and an era where investor-corporate dialogue will be vital, 60% of investors hold companies answerable on ESG, while 40% of executives face ESG questions on over half their investor calls. I firmly believe that scrutiny will help shape a more credible ESG market over time.”8

In conclusion, ESG will continue to exert a powerful, even growing, influence on the business environment. Although it has undoubtedly suffered setbacks over the past two years, these could prove positive in the long term if they lead to greater regulatory oversight, which could reduce negative trends such as greenwashing.

Source: WORLDBOX PRESS RELEASE DECEMBER 2023

Links

1. https://www.telegraph.co.uk/world-news/2023/09/26/european-union-members-net-zero-climate-change-war-ukraine/

2. https://www.ft.com/content/c4dafe6a-2c95-4352-ab88-c4e3cdb60bba

3. https://www.investmentweek.co.uk/news/4125430/defence-secretary-grant-shapps-esg-considerations-risk-undermining-uk-defence-industry

4. https://www.ft.com/content/fbe10867-fea1-4887-b404-9f9e301e102e

5. https://www.bloomberg.com/news/articles/2023-05-19/esg-investing-goes-quiet-after-republican-attacks

6. https://www.reuters.com/sustainability/sustainable-finance-reporting/esg-equity-funds-suffer-big-outflows-buffeted-by-market-jitters-us-backlash-2023-07-06/

7. https://www.financeasia.com/article/malaysias-net-zero-transition-expediting-esg/492586

8. https://www.funds-europe.com/news/investors-and-executives-see-esg-as-key-to-future-strategy

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