Speaking at TSESG in New York yesterday, I took a straw poll of the audience on whether the term “ESG investing” (as opposed to the practice of ESG/sustainable/responsible investing) would still be used in five years’ time. Only 10% of attendees thought the term ESG investing would survive. Someone later said to me that the phrase is “utterly toxic and will disappear in the US”. If that happens, there’s certainly a whole lot of marketing, branding, fund communication and PR work ahead of us.
Beyond my (clearly definitive) straw poll, the evidence remains mixed. Schroders, speaking before me, uses the term sustainable investment. BlackRock has strategically refocused to “transition investing”. Perhaps 20% of US ESG funds have been rebadged; while in Europe, after a phalanx of funds shifted from Article 9 to Article 8, the first half of 2024 saw 30 Article 8 or Article 9 funds remove ESG-related terms from their names (Morningstar). Despite this shift, there are still around 160 US mutual funds with ESG in the name, of which 21 have AUM of over a billion (plus about 90 ETFs). The tightened SEC fund names rule last year adds extra complexity for asset managers.
Even though we’ve been in what a PGIM speaker described as an “ESG recession”, the momentum of decarbonization, in particular, has become so embedded that it’s hard to see ESG disappearing so quickly. Look at the 4,000+ people in asset management globally who have ESG in their job title or the number of ESG investment jobs being advertised.
Bigger firms with more resources have often been able to pivot from ESG faster. It’s sometimes harder for smaller managers to manoeuvre, having invested in the term ESG; and ESG data and tech providers need to race to keep pace with buyside buyers. ESG is now marbled into a great deal in the asset management business, and probably has a future more as a neutral source of data and insights that inform the investor (and regulator), rather than mainly being a fund marketing tool with exceptional qualities.
The big winner in terminology is going to be sustainable investing. But thematic investing clearly is going to be an important niche, with stronger claims for alpha than “traditional ESG” was ever able to muster. Impact investing also has strong advocates, not least among institutional investors – a recent Mercer survey suggests 39% of the world’s biggest institutional investors are deploying impact investing strategies. The ultra long-term nature of such investors can make them role models for at least a portion of retail investors.
Personally I feel the term ESG has some advantages. Sure, some of America thinks ESG is communism, or fascism, or both (search X). ESG has the advantage of being a distinct acronym that people think they understand, and crucially can easily search and find. Terms like “transition” and “responsible” seem more generic and less easily defined.
Clever pivoting should be based on good market research on what investors actually want and are buying, but asset managers also know that you can’t run a business simply based on short term sales. A great deal of research shows that millennial and Gen-Z investors, and minorities, are much more supportive of ESG than older investors – including a particular interest in the “social” part of ESG, which is less defined than climate and decarbonization but likely to grow in importance.
In the US, November 5 cannot fail to have some bearing on ESG’s future, but the scale of climate transition in the IRA is now so embedded in investment portfolios that a major u-turn from sustainable investing seems unlikely.
However hard or soft your ESG pivot, an integrated approach – from investment to data to marketing and sales – is going to be crucial. Your positioning should be well understood, from your board and shareholders to your salespeople. CEOs in particular need to know what is on their website about ESG/sustainable investing, and be comfortable and not defensive in explaining their approach. Lots of work ahead.
Andrew Marshall is Cognito’s Managing Director, New York and Vice Chairman