ESG 2.0: A New Narrative for Sustainable Investing

In the evolving landscape of sustainable investing, Environmental, Social, and Governance (ESG) principles have faced skepticism and polarization. 

Initially embraced for promoting corporate stewardship, ESG is now debated for its impact, efficacy, and political connotations. Despite this, one fact remains clear: the foundational principles of ESG cannot be ignored by businesses striving to navigate the intersection of finance and ethics.

How can organizations strategically communicate their ESG strategy without being sidetracked by stories that might impact their credibility and trust? Does the negative association only affect the term “ESG,” or does it extend to the broader concept of sustainable investing? Several companies have already initiated rebranding efforts for their sustainable offerings.

The Rise and Fall of ESG Investing

ESG emerged as a pivotal framework for asset managers to serve ESG values–driven investors, including institutions prioritizing societal benefits and advocates for green initiatives. Notably, industry giants like BlackRock and Vanguard embraced ESG principles leading to its mainstream acceptance. This rise was fueled by heightened awareness of the link between corporate conduct and broader societal concerns, driving conversations around responsible investment and sustainable business practices.

ESG investing has experienced fluctuations since the early 2000s, with a significant surge in recent years. It now finds itself at a pivotal juncture.

The Challenge Ahead: Downturns and Political Scrutiny

The rapid market growth, combined with a lack of regulation and transparency around the term and investment standards, has sparked concerns about greenwashing and efficacy. This credibility issue partly stems from companies rushing to market with poorly defined products, aiming to capitalize on the growing demand for sustainable investing. Many early ESG funds failed to deliver on returns, lacking genuine environmentally conscious investment strategies.

Additionally, there has been political backlash as a result of the implications of ESG on major industries. Recent events in Texas reinforce a growing resistance to ESG investment; the termination of an $8.5 billion investment with BlackRock reflects concerns over the firm’s alleged boycott of energy companies. This move aligns with a broader pushback against perceived ESG ideologies, highlighting the complexities of finance and values-driven investing.

In line with these developments, ESG investing experienced a downturn in 2023, with a significant decrease in mentions during corporate discussions. Compared to the last quarter of 2022, there was a 23% decline in the count of S&P 500 companies referencing “ESG” during earnings calls in the first quarter of 2023. This decline extended to ESG funds, which saw a decrease in assets under management, resulting in the closure of several funds on Wall Street. Additionally, a recent survey unveiled a significant percentage of CEOs scaling back their ESG initiatives, signaling a shift in priorities.

Figure 1

The graph above illustrates a decrease in funds established in the US referencing sustainability in their name, indicating that the decline encompasses not just ESG, but sustainable investing overall.

ESG for a New Generation of Investors 

Despite current challenges, awareness of climate change issues is growing, and investors are increasingly seeking opportunities to align financial goals with environmental values, boosting demand for sustainable funds. Notably, Gen Z and Millennials show high levels of engagement and concern about climate change.

Recent research underscores the high interest in ESG investing among younger generations, with 96% of millennials and 85% of Generation Z expressing enthusiasm for ESG products. The significant intergenerational transfer of wealth* expected in the coming years, estimated at $84 Trillion in the U.S. alone, presents a significant opportunity for sustainable investing.

Given the stigma surrounding industry terms, rebranding the language of ESG presents a strategic opportunity to meet the market needs and interests of younger audiences while simultaneously deflecting some of the political baggage the term has taken on. This rebranding initiative aims to ensure widespread appeal across all demographics, fostering renewed enthusiasm for sustainable investing.

Reframing ESG

ESG could benefit from observing the evolution of language in environmental discourse, much like the transition from “global warming” to “climate change” as the preferred term. Just as this shift helped depoliticize the conversation, rebranding ESG with more neutral alternatives can help mitigate charged responses and cultivate a more unified approach to sustainable investing.

In fact, the financial landscape is already witnessing a significant shift in terminology surrounding how ESG is approached. Survey data from RBC Capital Markets reveals that 56% of sustainable-fund debuts have opted to re-label their products as “thematic” rather than “ESG.” This strategic move signals a recognition within the industry that an ESG rebrand may be detrimental to investor appeal. 

Leaders in the financial sector, including BlackRock’s CEO Larry Fink, have taken steps to distance themselves from the ESG label, and are reconsidering their language and strategies. Fink’s decision to cease advocating for ESG principles underscores the changing dynamics surrounding sustainability in finance. Business leaders are increasingly opting for terms such as “transition investing”, “responsible business” or “climate risk integration” to describe their initiatives, and better align with client preferences while avoiding negative associations. This shift indicates a broader trend towards rebranding, as seen at Davos earlier this year, with discussions surrounding new strategies to refine the ESG language.

Ultimately, regardless of the terminology used—be it transition investing, sustainability, or ESG—this sector demonstrates robust growth and substantial investment potential. The designation may vary, but the concept is here to stay.

“A rose by any other name would smell as sweet”

To paraphrase Shakespeare, an investment structure by any other name would support the same principles.

While recent challenges have cast doubts on ESG’s viability, the recognition of a generational shift towards ethical investment presents an opportune moment for rebranding efforts. A strategic rebranding of ESG could resonate with both current and future generations, fostering renewed enthusiasm for sustainable investing. Industry leaders are already heeding this call, with many opting for alternative terminology and communication strategies to align with evolving investor preferences and rebuild trust in sustainable investment practices. As we stand at the intersection of financial evolution and ethical imperatives, the decision to rebrand ESG presents not just a strategic move, but a transformative opportunity to align sustainable investing with the values of tomorrow, shaping a more resilient and equitable global economy.

*Read more about the greatest wealth transfer in the Ricciardi Group’s Evolving Global Wealth Landscape report.