ESG is evolving, not dead

In recent years, ESG investing has been both praised and scrutinised, with many wondering whether its influence is fading. Darius McDermott, managing director at FundCalibre, provides a clear perspective on the matter: “The ESG investing landscape is going through a period of significant transformation.” While the frenzy surrounding ESG in 2020-2021 has cooled, the principles and value of ESG investing remain crucial, and its evolution continues.

Sentiment at all-time lows

However, in recent years, geopolitical events like Russia’s invasion of Ukraine and rising political opposition—particularly in the US—have fuelled scepticism toward ESG. BlackRock’s Larry Fink reflected the views of much of the asset management community when he vowed to stop using the phrase ESG because it had become “too politicised”. The world’s largest investment manager has faced an uphill battle in US ‘red’ states, as Republicans rebel against its view that climate change carries investment risks. Some US states have even passed laws restricting ESG-driven investment strategies, further amplifying the narrative that ESG might be “dead.”

Yet this sentiment overlooks a key reality: ESG is evolving, not disappearing. Darius likens the current climate to the early 2000s tech bubble. “In 1999, technology stocks were flying, and when the bubble burst, people thought tech was finished. Now, technology is an essential part of our economy.” He argues that the market volatility facing ESG today doesn’t signal its demise but rather represents a period of transformation and recalibration.

The role of technology in shaping ESG’s future

One of the most significant opportunities for ESG investors lies in the technology sector. While tech companies are increasingly scrutinised for their growing energy consumption — particularly data centres and AI technologies — the tech industry is also playing a pivotal role in finding solutions to global sustainability challenges.

Deirdre Cooper, co-manager of Ninety One Global Environment, points out, “Technology is a key driver of sustainability. Despite the negative sentiment, we continue to see strong deployment of clean technologies such as renewable power, electric vehicles and electrification. Companies like Amazon, Google, and Microsoft are leading the way by adopting renewable energy at scale and making their data centres more energy efficient.”

Technological innovations, AI, in particular, are proving to be a game changer for ESG. Deirdre adds: “Not only is AI driving a structural increase in the demand for clean power, but it’s also driving change for a myriad of energy-efficiency solutions across semiconductors and electrical equipment.”

With applications ranging from optimising supply chains to reducing waste and improving resource management, AI’s potential to drive sustainable solutions is immense. For example, AI-powered energy management systems can make buildings and factories more efficient, while smart grids can balance renewable energy sources, addressing the challenge of energy variability.

Charlotte Ryland, co-manager of the CCLA Better World Global Equity fund, told us recently about holding ServiceNow, a cloud computing platform helping companies manage digital workflows. She says: “They are beginning to develop some AI tools, which help with digitising things such as supply chains and HR services. It’s not revolutionising their business, it’s just making it slightly more efficient. People worry about AI replacing jobs, but I think what we’ve found through history is when new technology comes in, yes, some jobs might be done by computers, but there’s always new tasks, new efficiencies and opportunities that come out of that technology as well.”

Beyond energy efficiency, AI is also tackling social and governance issues. AI-driven analytics are helping companies manage diversity, improve workplace safety, and even monitor human rights practices across global supply chains. As technology continues to evolve, its role in ESG will only deepen, offering investors new opportunities for integrating sustainability into their portfolios.

ESG’s resilience and future opportunities

While ESG investing is undoubtedly in a period of adjustment, it remains far from obsolete. The challenges and scrutiny ESG faces today are natural as the market matures.

Darius adds: “Despite negative sentiment and political challenges, we believe the premise of ESG, or sustainability, or whatever label fund managers choose to attach to it, is sound. In practice, many fund managers are still paying close attention to environmental, social and governance factors because – done properly – it makes investment sense, helps direct them to opportunities and steers them away from risks.”

There are undoubtedly real opportunities inherent in solving some of the world’s largest problems and it can be a sensible way to search for growth. One generalist option is the CT Responsible Global Equity fund. This is a core global equity fund with a strong record of stock picking and an independent responsible investing team. With roughly a third of the portfolio allocated to technology, its top holdings include Apple, Alphabet and Nvidia*. Its approach means it has swerved many of the problem areas in recent years.

Liontrust Sustainable Future Global Growth is another option with a broad remit, assessing all of its holdings through three mega tends: better resource efficiency (cleaner), improved health (healthier), and greater safety and resilience (safer). With a high conviction portfolio of 40-60 stocks, the fund has been slightly more volatile versus its peers in the sector in recent times. However, the flexibility of the portfolio means the managers can tap into a number of emerging sustainable themes, which offers a real alternative in the global sector.

“These types of funds would remain our preferred way to build a sustainable portfolio,” says Darius, concluding: “The ESG ‘party’ may be over, but the long-term significance of ESG investing is only beginning to take shape. Investors who stay the course will continue to see ESG as a vital part of their portfolios in the years to come. ESG isn’t going anywhere. It’s evolving, adapting, and becoming more sophisticated. The future is still very bright.”

*Source: fund factsheet, 31 August 2024