After outflows from U.S. sustainable funds begin for the first time in a calendar year in 2023, it is time for investors to consider reasonable sustainability as a midpoint between abandoning and continuing with ESG investing.
ESG investing (considering environmental, social and governance issues as part of financial analysis) has taken a hit since Russia's invasion of Ukraine in early 2022. U.S. sustainable funds have weathered their first calendar-year outflow since Morningstar MORN began tracking this data more than a decade ago. Investors withdrew $13 billion from U.S. sustainable funds in 2023, with U.S. sustainable fund closures outpacing sustainable fund launches in the second half of 2023. Political backlash against ESG in the US, relabeling of ESG products, and declining performance of ESG funds beyond 2022 are contributing to this outflow. New Hampshire lawmakers even introduced a bill last week that would make it a felony to use ESG criteria in state funds.
At the same time, ESG quietly began a rebrand. For example, last June, BlackRockBLK CEO Larry Fink publicly abandoned the term “ESG,” but noted that BlackRock has not changed its stance on ESG issues. Additionally, the World Economic Forum released a report on its Stakeholder Metrics Initiative earlier this month. Since its launch in 2021, 158 companies have already started using it to report on People, Planet, Prosperity and Governance principles in their mainstream reporting materials. .
Rather than oscillate between the extremes of abandoning ESG integration or simply rebranding without addressing legitimate ESG concerns, institutional investors should consider the new We would benefit from reconsidering the middle ground of what we are looking for in research: rational sustainability.
What is rational sustainability?
Core, results-oriented, transparent. Rational sustainability focuses on creating long-term value for essential reasons, regardless of whether long-term value creation drivers such as productivity, innovation, or culture fall under the ESG label. I'm guessing. Rational sustainability welcomes sustainability analysis as part of core investment decisions and avoids politicization through bland terminology. We pursue all our social goals in a sustainable way and are clear about our non-financial goals and the financial benefits we are willing to sacrifice for them.
It is evidence-based and rational. Rational sustainability involves a careful approach to analysis and logic. We focus on aspects of sustainability that are relevant to financial performance and explore the complexities of measuring aspects of sustainability that are uncorrelated or negatively correlated with revenue. For example, although the highest quality academic evidence, including research by Wharton's Katherine Klein and Harvard's Jesse Fried, has found zero or negative associations between diversity and corporate performance, , a comprehensive measure that incorporates equity and inclusion shows a positive association with performance. . Rational sustainability avoids herd mentality and allows investors to sell overpriced sustainable companies and buy undervalued sustainable companies that don't tick the ESG boxes.
I concentrated. Rational sustainability recognizes that increasing sustainability beyond a certain point can mean reduced benefits, increased costs, and trade-offs between social and environmental issues. Masu. Rational sustainability allows companies to focus on sustainability activities where they have unique expertise and prioritize the stakeholders most important to their business model.
Aiming for a rational and sustainable investment portfolio
Environmental, social and governance issues remain important to investors, corporate boards and executives, regulators, employees and customers. A focus on outcomes, careful analysis, and an awareness of trade-offs are also key to incorporating sustainability into the investment process in a way that maximizes long-term value creation for the stakeholders most important to your business model. is.
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