HL’s Rowles: ‘The ESG backlash is our own fault’

The ESG backlash didn’t come out of nowhere. It was predictable and to some extent, the investment industry brought it on itself.

We spent years building ESG into an industry buzzword, attaching it to everything from fund names to annual reports. We promised it would drive better returns, remove systemic risk, accelerate the transition and maybe even save capitalism along the way. But when push came to shove, we rarely explained what ESG actually was.

It’s not surprising we’ve ended up here: anti-ESG legislation on the rise in the US, headlines accusing it of being ‘woke capitalism’ and asset managers dropping the acronym like it’s radioactive. All this, while climate risk is rising, governance failures remain frequent and social inequalities – especially health and wealth gaps – are growing.

We got lazy with the narrative. ESG was never meant to be an ideology – it was a risk lens. A way of improving long-term decision-making by factoring in things that don’t show up in a quarterly earnings call. It’s valuable, too. Most mainstream fund managers consider ESG in one way or another, and the FCA is clear that ESG analysis is part of a fund manager’s fiduciary duty.

But somewhere along the way, we let the hype outpace the substance. And when ESG started being scrutinised on things like performance, impact and integrity, the industry wasn’t ready with clear, consistent answers.

So yes, the backlash is frustrating. But it should also be a wake-up call. If we want ESG to be taken seriously, we need to take it seriously ourselves. We need to be precise in our terminology, clearly differentiating between ESG integration for risk management purposes and sustainable investing. Regulation will help us here – the FCA’s Sustainability Disclosure Requirements do a good job of helping investors identify the funds with a genuine sustainability story to tell.

We also need to hold ourselves to higher standards by being honest about trade-offs, consistent in our reporting and ensuring ESG-related metrics are meaningfully embedded in incentives. If we don’t, we risk losing the trust of the clients ESG was supposed to serve.

This article originally appeared in Portfolio Adviser’s October magazine