ESG investors aren’t the only group of people who sometimes wonder if their efforts to save the planet are truly worthwhile. After all, earth’s climate is rapidly approaching an environmental tipping point, right?
“Motivated by equal parts fatalism and exhaustion, many [people] are reporting less enthusiasm in causes they’ve typically cared strongly about—like the environment,” says a 2024 Trends Report from Starcom, a global marketing firm based in Chicago.
Doubt and cynicism are even creeping into the minds of academic researchers. “When wildfire smoke makes it dangerous to even go outside, it’s easy to feel overwhelmed or hopeless,” said Peter Pellitier, a postdoctoral fellow at the Stanford Doerr School of Sustainability. “It can be a bit of psychological gymnastics to understand if your research is mattering and to stay motivated or interested in the classroom.”
Pellitier is lead author of a report published by Nature Climate Change that describes the impact that emotional responses such as grief, hopelessness, and despair about climate change can have on researchers and their findings. “Reports of climate anxiety and ecological depression are rising rapidly, particularly among younger generations. For example, a concerning 45% of youth across 10 countries report that their emotions about climate change, such as sadness, fear, anxiety, anger, and guilt, negatively impact their daily functioning,” he wrote.
Politicians continue to bloviate about woke capitalism, ESG reporting criteria are still fuzzy at best, and the flow of investment dollars into ESG mutual funds receded in the last few months of 2023. Is ESG investing just an exercise in futility, an emotional band-aid designed to soothe our fears about the future of mankind?
Not at all.
The first notion we must abandon is the assumption that the planet is approaching—or has already passed—some kind of irreversible environmental tipping point.
“For the set of likely future scenarios we face today, the climate science literature has not identified any approaching global tipping point after which runaway climate change intensifies beyond humanity’s ability to arrest it,” writes Seaver Wang, co-director of the Climate and Energy team at the Breakthrough Institute. To be clear, there are depressing milestones, such as the thawing of the Arctic permafrost and the destruction of the Amazon Rainforest. But their influence is dwarfed by, “societal factors that will ultimately determine the planet’s climate trajectory,” Wang wrote in April 2023.
In other words, we should never underestimate the sheer ingenuity and resourcefulness that gave mankind the internet, heart transplants and electric cars.
Second, even if we agree that investors must sacrifice some financial returns to invest responsibly (which is categorically untrue), ESG investing delivers significant and far-reaching economic benefits that ultimately buoy the entire stock market, according to research published in the November 2023 Journal of Asset Management. “Adopting a theoretical portfolio construction model, we find that the optimal allocation to ESG investing is governed more by economic improvement than by ESG out/underperformance,” the authors wrote. “Indeed, even if the ESG portfolio underperforms, an allocation to ESG investing can still be warranted due to better investor return via an improved economy.”
Of course, there are ESG mutual funds that underperformed the S&P 500 Index’s 26.3% gain last year, but there are also plenty that outperformed the benchmark, including Vanguard’s FTSE Social Index Fund (+31.8%), the iShares ESG Screened S&P 500 ETF (+29.8%) and Fidelity’s U.S. Sustainability Index Fund (+29.04%), just to name a few.
ESG factors are firmly embedded in corporate culture.
“In 2024, businesses are expected to embrace ESG criteria not just for compliance or risk management, but as a chance to fundamentally transform their business models…” wrote Natalie Runyon, Director of ESG content & Advisory Services at the Thomson Reuters Institute. “ESG will transition from being a peripheral element to a central component of overall corporate business strategies.” Assets invested in European mutual funds dedicated to biodiversity and nature quadrupled last year, she added.
In early January, there were more than 64,000 positions available on LinkedIn that mentioned the word “sustainability.”
Inflation cooled, interest rates appear to have peaked, and some growth stocks had “unjustifiably cheap valuations,” in 2023, Aegon Asset Management’s Iain Snedden told Reuters in late December. “Despite a difficult couple of years, there are signs that the market backdrop is becoming more favorable for sustainable strategies [in 2024],” he said.
Finally, there is one undeniable fact that should put wind in the sails of every ESG investor, according to Robert Sheen, founder and CEO of Trusaic, a purpose-driven technology company based in Los Angeles. “The debate around ESG is frequently unhinged from a simple fact,” he wrote in a piece for Forbes magazine last July. “ESG-related risks are now among the greatest and most urgent threats businesses face.”
Stay strong. Keep the faith. And never lose hope.