What is next for ESG investments?

Oksana Patron

21 December 2022

Although the investment vehicles which incorporated environmental, social, governance (ESG) considerations tended to underperform non-ESG peers in 2022, raising the question of validity of ESG, there are still key reasons why ESG will remain relevant for investors going forward.

This included how geopolitical uncertainty would catalyst the energy transition, which is expected to happen “but not immediately”, the continued polarisation of attitude to ESG in the US and how biodiversity loss would become an investor priority, global head of ESG Investments at Janus Henderson, Paul LaCoursiere and ESG content manager, Bhaskar Sastry, said.

According to Janus Henderson ESG Investment Outlook 2023, the Russia-Ukraine-led energy crisis revealed both the interlinked nature of the global economy and its dependence on fossil fuels, which in consequence would see governments needing to implement costly energy rescue packages and price caps, which already hit countries’ faltering fiscal budgets.

The energy crisis would also bring the energy trilemma into sharp focus, forcing the countries to find new ways how to ensure energy security, affordability, and sustainability.

The investment outlook pointed to the fact that even though many countries were naturally focused on building fossil fuel energy reserves, it was clear that they could and should not abandon fossil fuels at this stage.

“Consequently, starting in 2023, we expect governments to begin to adopt a longer-term strategy focused on boosting investment in and deployment of renewable energy, thus making progress towards ‘solving’ the energy trilemma and achieving a Just Transition, in which benefits of the transition to a green economy are shared widely and those who stand to lose economically are supported,” the report said.

LaCoursiere and Sastry highlighted in the report that prior to 2022, there were nuanced disagreements around ESG; however, the fundamental proposition of ESG integration – that it wsa worthwhile to incorporate ESG and climate considerations in the investment process – was largely unquestioned.

“This year, the mood has shifted. ESG funds and strategies that allocated to technology growth stocks and underweighted energy stocks have typically underperformed their non-ESG counterparts. Questions over the role of ESG in fiduciary duty are being retraced. Meanwhile, companies and investors have been expected to uphold ever stronger ESG standards, notably in the US. Disquiet has turned into fundamental disagreement.”

Additionally, criticisms largely came from the Republican Party and the US political right, which have denounced ESG variously for being a left-wing ideology, an instrument of global elites, a threat to the domestic fossil fuel industry, and, ultimately, a detractor from financial returns.

“We don’t expect the divisions between the sustainability champions and the ESG doubters to resolve anytime soon. Indeed, it’s likely the polarisation will become starker in 2023,” Janus Henderson ESG head said.

“In our previous outlook, we called for realism and honest debate about what ESG can and cannot achieve. This is more important than ever. We believe we need to remove the hyperbole and define what ESG really is.”