The end of ESG?
Hannah Vanstone, Lead Sustainable Finance Regulatory Affairs Officer, LMA

ESG is dead – or at least you’d be forgiven for thinking that based on recent headlines.
But we disagree. Indeed, ESG is still very much alive and kicking. However, it is our view that, just as summer recently transitioned into autumn in the UK, ESG is entering a new season – a complex and critical one that will determine its long-term legacy.
Has ESG had its day in the sun?

Recent data from the labelled loan market does point to a dampening of spirits. SLL volumes have fallen 19% from their peak in 20221 and green loans remain a relatively small part of the market at 4.52% (Bloomberg, 02/09/24). Similarly, net monthly outflows from ESG equity funds stood at a record level of $14bn in April 2024.2 There is already evidence that factors including the anti-ESG backlash, increasing scrutiny around ESG claims and increased regulation have led some to pull back from making claims about their ESG credentials (so-called “greenhushing”).3
Beyond these headline figures, there are deeper trends which may be driving a structural shift of the market away from ESG:
1. Politics
2024 is a record year for elections, and in the US and elsewhere, ESG has become a political issue – even being branded as an example of “woke capitalism”.4 The outcome of elections will undoubtedly shape the future impact of ESG.
Following the results of the European Parliament elections in June this year, some have already predicted that we could see a weakening of existing climate laws over the next five years.5 A recent Economist article further suggested a win for Trump may lead to the EU Taxonomy being amended to permit more investments in defence.6
However, the picture is not universally clear. In the United Kingdom, for example, the newly elected Labour party has already announced a host of policies aimed at combating climate change, including a vow to lift the de facto ban on onshore wind farms.7
2. Macroeconomic factors
Macroeconomic conditions and geopolitical tensions have added to the headwinds for ESG. Higher interest rates have made financing more challenging, and against this backdrop ESG may have fallen down the priority list for treasury teams with limited time and resources.
The war in Ukraine has reminded many market participants of the importance of energy security and boosted demand for oil and gas companies. Meanwhile, the relative underperformance of ESG investments8 (for example, from May 2023 to May 2024, global sustainable equity funds made an 11% return, compared with 21% for conventional stock funds)9 has raised the question of whether pursuing ESG goals is at odds with investor returns and asset managers’ fulfilment of their fiduciary duties.10
3. Greenwashing and ESG litigation risk
High profile greenwashing cases have hit the headlines over recent years, causing reputational and often financial damage to those involved. These cases have spurred the development of anti-greenwashing regimes worldwide, in which making excessive claims about ESG credentials risks incurring fines or other regulatory sanctions. Similarly ESG litigation - and climate litigation in particular - poses another risk, with over 2,700 cases currently captured in the Sabin Center for Climate Change Law’s climate change litigation databases.11 Many of these cases have centred on claims of climate neutrality or other environmental claims.12
1. M. Kuchtyak 'In 2023, global SLL volumes tumbled 19% to $548 billion from a record-high of $677 billion in 2022.'
(2024): 'Quality is key to growth in sustainability-linked loans'
2. Investors pull cash from ESG funds as performance lags (ft.com)
3. What is ‘greenhushing’ and is it really a cause for concern? | World Economic Forum (weforum.org)
5. Explainer: From trade to climate, five takeaways from the EU election | Reuters
6. Investors exit clean energy funds as higher interest rates bite | Reuters.
7. Policy statement on onshore wind - GOV.UK (www.gov.uk).
8. This statistic is quoted in the FT, attributing it to a May report from J.P Morgan.
P. Temple-West and W. Schmitt (June 2024): 'Investors pull cash from ESG funds as performance lags'
9. Investors pull cash from ESG funds as performance lags (ft.com)
10. Environmental, Social, and Governance Factors v. Fiduciary Duty - JSTOR Daily
11. About - Climate Change Litigation (climatecasechart.com)
Are we at the start of the end of ESG already?

In a word: no. The reasons why are numerous and include the following:
1. Regulation
Corporates already operate within the context of a number of recent ESG regulatory regimes. In Europe, these include ESG reporting requirements arising from the Corporate Sustainability Reporting Directive and other reporting regimes. Banks and non-bank financial institutions are similarly caught by a range of ESG disclosure requirements under regulations in the UK and EU.
At an asset level, there is a risk that assets become ‘stranded’ – that is, that they lose significant value or become liabilities due to changes in the market or regulatory environment. This risk is already starting to materialise in certain sectors (e.g. price differentiation between top-rated and poorly performing real estate assets13).
2. Risk management
Neither ignoring ESG nor greenhushing are likely to be an effective long-term solution to managing the risks arising from environmental, social and governance factors. It will not, for example, protect against transition risk, where minimum regulatory standards are imposed by law. Nor will it protect against climate-litigation risk, where business activities can be linked to environmental or social harm. Companies that resist integrating ESG into their decision-making aren’t merely missing out on opportunities, they risk being left behind.
3. The Value Proposition
Finally, it is impossible to ignore the focus of investors on ESG.
A recent survey from PwC reported that three quarters of investors agree that how a company manages sustainability-related risks and opportunities is an important factor in their investment decision-making.15 ESG matters are already integrated into investment decision-making processes throughout the market. Companies therefore need to be prepared for detailed questioning about a range of ESG issues and how they will transition their existing business activities.
13. How the conversation around green real estate is changing | World Economic Forum (weforum.org)
14. Gao, Yumeng and Herbert, Benjamin and Melin, Lionel, The ESG Disclosure Premium (April 24, 2024). Available at SSRN: https://ssrn.com/abstract=
ESG remains well and truly on the agenda.
So while some may not be shouting about ESG matters quite so loudly now, ESG remains well and truly on the agenda. Those who fail to take ESG seriously may find themselves stuck out in the rain without an umbrella for cover.
We will be discussing in more detail how politics is shaping the ESG agenda as well as the value proposition for sustainability at our upcoming Sustainable Finance Conference on 7 November.
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