Impact managers will insulate themselves from the ESG backlash with returns

The anti-ESG backlash in the US may be concerning for some, but for the world’s largest impact investors, it appears not to be causing sleepless nights.

While the language used in attacks on sustainability tends to focus on the “ESG” acronym, definitions in this area are notoriously fluid. “Ask 10 fund managers what it means, and you will get 11 different opinions,” says Bill Green, managing partner of Climate Adaptive Infrastructure, in New Private Markets. This potentially leaves any type of sustainable investment in the firing line.

Nevertheless, some in the impact universe take comfort from the distinction between ESG and impact investing, which leaves the latter protected against attack.

“We don’t think of EIP as a firm founded in ESG, but as an impact firm that strives to help our partners on their journey to net zero, address climate change and seek returns from investment opportunities with a unique business model,” says Hans Kobler, founder and managing partner of Energy Impact Partners.

Kobler, CAI’s Bill Green and others were speaking with New Private Markets as part of a series of mid-year Q&As with leading figures from firms on the Impact 50 list.

CAI has “largely side-stepped the ‘tempest in the teapot’ around ESG”, notes Green. “We view this debate as a distraction from the critical importance of addressing the climate crisis […] As nearly everyone now appreciates after the hottest July ever recorded on our planet, our work has nothing to do with ‘being woke’ – this is an urgent matter of common-sense investing.”

Indeed, for those in the climate investing space, the positive impact of the Inflation Reduction Act has proved a more powerful tailwind than any potential anti-ESG headwinds. “Partly on the back of the Inflation Reduction Act, we have seen an increase in the breadth and number of investment opportunities across energy and the climate transition,” says Jules Kortenhorst, partner at Vision Ridge Partners.

For those in Europe – away from the epicentre of the attacks – it is the simple wrong-headedness of the criticism that leaves impact professionals feeling sanguine. “We believe that companies that are well-managed from an ESG perspective are more likely to generate sustainable long-term returns, and that investors have a responsibility to consider the impact of their investments on society and the environment,” says Michael Wehrle, Zurich-based head of investment solutions at BlueOrchard, when asked whether the backlash has affected their business. “However, we recognise that the political climate around ESG issues can impact the broader investment landscape, and we are monitoring developments closely.”

‘Widespread acknowledgment’

Pia Irell, a partner at Trill Impact, an impact investing firm headquartered in Stockholm, believes the political attacks on ESG are eclipsed by the prevailing “widespread acknowledgment of ESG considerations as vital factors in assessing risks and opportunities during the investment process.” The regulatory environment in Europe is a further driver of “responsible capital allocation”, she adds. Indeed, Irell sees the discussions prompted by the anti-ESG as potentially catalysing “constructive dialogue” that will help distinguish between “genuine value-creating ESG efforts and those merely categorised as ‘impact washing’”.

The long-term effects of partisan bashing of ESG are unclear. While the legislative impact has thus far been more symbol than substance, some fear that the cumulative impact of the anti-ESG messaging will put the brakes on much-needed investor action to meet society’s biggest challenges.

Managers of impact capital seem confident that good sense will prevail and investors will continue to commit capital. As is often the case, whether investors continue to do so at scale will be primarily a function of financial returns: the best way to keep the tempest in the teapot will be to meet investors’ expectations for financial performance.