ESG disappearing from headlines but still self-evident in risk assessments

In recent months, ESG has been rapidly disappearing from the names of investment funds and also from the marketing speeches of companies. For investment funds and companies alike, however, the seeming disappearance of ESG does not signify an easing of sustainability requirements. For investors and companies, it is not only about green values but also assessing risks and opportunities, in which ESG plays a significant role, though not the only one.

The ongoing trend in sustainability funds, particularly in Europe and the United States, has been analysed by Henri Koponen in the Finnish investment magazine Arvopaperi in February 2024, by Professor Vesa Puttonen in an interview with Aalto University Executive Education’s stakeholder magazine Aalto Leaders’ Insight in November 2023, and by Petja Pelli in his article in the leading Finnish daily Helsingin Sanomat on 7 November 2023. Here I also look at the current ESG factors affecting companies.

Multiple reasons for missing ESG prefix 

One of the reasons behind the removal of the ESG prefix is the lack of proof substantiating sustainability from the perspectives of both funds and investment targets. Operations may indeed be sustainable, yet the evidence is lacking, such as comparable metrics and reported data that has been independently verified. As a result, there is no basis for using the ESG abbreviation, which refers to the environmental, social, governance dimensions of sustainability.

For investment target companies, removing ESG from fund names and marketing does not mean an easing of sustainability requirements or ESG development work. Quite the contrary. The situation is already serious for many companies – even a matter of life and death for the future of their business. Customers, investors, consumers and stricter directives are demanding comparable proof of sustainability from smaller and smaller companies. This requirement is extending further and further into supply chains and, with the Green Claims Directive that is being prepared, also into marketing.

One goal is to avoid greenwashing

The dangers of greenwashing have also been raised in the financial sector and its supervisory bodies, which may be another reason for the disappearance of ESG from the names of funds. In his interview with Leaders’ Insight, Vesa Puttonen states that: “The green transition and sustainability are huge business opportunities, and financing for green projects is available – sometimes even more affordably and easier than for other investments. The possibility of cheaper financing tempts companies to alter the truth and appear more sustainable than reality.” He continues: “Something that is important is ruined by greenwashing.” 

According to Puttonen, the problem with ESG is that sustainability has become a vague sales term that can be used in any context, as long as you package it correctly.

Mika Leskinen, CIO at S-Bank, who regularly publishes about sustainable investing and participates in the discussion on ESG issues, also thinks along the same lines. In the Arvopaperi article, Leskinen is quoted as saying that ESG has gone wrong in that the general public still has the wrong idea of what ESG means in connection with investing. 

“It is thought that ESG involves investing in so-called kind or good companies while leaving everything else out. That’s just a fraction of the full picture. The essence of ESG is to try to identify economically relevant ESG issues and then analyse how they affect the share price,” says Leskinen in Arvopaperi. 

Investors alone may not have an impact on climate change, for example, yet according to Leskinen, they understand very well that climate change has an impact on investment targets.

ESG is a hot potato among US investors

Investors in the United States have also been disappointed by how the return expectations of investment targets defined as sustainable have not been met with better returns than other investment targets, at least in the short term. A movement against ESG investing that began in Texas has even tried to use political means to curb the directing of investments towards sustainable targets at the expense of other alternatives. 

According to the above-mentioned Helsingin Sanomat article, even though opposition to ESG was not yet particularly widespread in the United States last November, anti-ESG laws were already in force in several states. These laws argue that considering environment or social sustainability in investment decisions represents an unfair boycott of less sustainable companies.

However, according to Danielle Fugeres, President & Chief Counsel of the American activist investor organisation As You Sow, as quoted by Helsingin Sanomat, companies should have full freedom to analyse the market and the future according to the best available information.

Mika Leskinen from S-Bank thinks along the same lines in the article published in Finnish by the S-Bank on 29 September 2023.

“These politicians apparently feel that the interests of their electorate are for some reason in conflict with the fact that investors want the best possible return-risk ratio for their investments, which in turn requires the use of all relevant information in investment decisions. I think the opposition to ESG investing reflects the fact that it really impacts the real world. Because why oppose something that has no effect?”, Leskinen asks.

Although the criteria is still developing, ESG monitoring is already self-evident, at least here in the Nordic countries

Another possible reason for the disappearance of the ESG prefix could be unclear criteria. This topic has been analysed in more detail in the above-mentioned Arvopaperi and Leaders’ Insight articles. 

Both investment funds and companies are facing the same situation. Both may have difficulties interpreting what the stricter sustainability directives mean in practice and what criteria are used to compare the outputs, in which case the easiest way is to leave ESG uncommunicated and out of the names. It is worth remembering, on the other hand, that this too is a strong message that expresses a lack of commitment, even if they invest in sustainability. Slowing down and remaining silent can also backfire.

With regard to investment funds, at least in the Nordic countries, another reason may be that, in principle, almost all equity funds here already meet the basic sustainability criteria and have ESG monitoring. As a result, it no longer stands out. Funds that use the term sustainable should meet stricter criteria, yet at the same time, the criteria is still being developed.

ESG assessments ultimately come into play in mergers and acquisitions

It is indeed positive that ESG no longer appears in the names of investment funds on too light grounds, and hopefully in no other connection that lacks verified, comparable, easily found and interpreted, openly communicated evidence. When using the abbreviation, one should be able to trust that the fund is a more sustainable investment target than others and that the company’s product has been sustainably produced starting from the raw materials throughout the product’s life cycle.

Ultimately, ESG comes into play when planning financing or mergers and acquisitions. This was also discussed by Petteri Laakso from Virta Growth Partners at an event organised by the Central Finland Chamber of Commerce in Jyväskylä on 3 April 2024, where the topic was “Growth with the help of a Venture Capitalist”. 

“We now conduct a separate ESG Due Diligence on all new investments during the investment phase, covering a wide range of themes related to the environment, social responsibility and governance. ESG deficiencies in target companies can lead to quite serious consequences. Such deficiencies are undesirable even from a financial point of view, not to mention the ethical aspect. Legislation may not directly result in reporting requirements for the smallest companies, but suppliers do receive such requests for information from larger customers and must be able to respond to them,” Laakso points out.

“ESG also affects the acquisition of financing. ESG is climbing up everyone’s agenda all the time and will probably also become increasingly connected to the availability of financing from banks. The same applies when it comes to mergers and acquisitions. The perspective buyer will probably conduct an ESG assessment. At best, ESG can be a source of competitive advantage, but for the vast majority of companies, the situation is also that they simply cannot afford not to be sustainable,” Laakso continues.

ESG and stakeholder dialogue on sustainability themes represent risk management

ESG and communicating it is therefore largely a question of risk management from the point of view of both investors and companies. The ESG impacts of investment targets will be evaluated, whether the abbreviation is visible or not, and whether the company is a green investment target or not.

“Today, ESG plays an extremely large role when it comes to mergers and acquisitions, whether the buyer is a company or a capital-type entity. In practice, you cannot have a business or a loan if there is anything that does not stand the light of day,” explained a representative of the investment and finance sector in an interview with Medita at the turn of 2023.

“Venture capitalists want sustainable companies. ESG is already mainstream, and the majority of venture capitalists take sustainability aspects into account. It is a big risk if the importance of ESG is not taken into account and understood within the company. It also affects the availability of employees. Young people want to do meaningful work in a meaningful company. The change in consumer behaviour can also result in reputational damage for companies in which ESG has not been taken into account. There is a shortage of sustainable companies that actually solve some sustainability problem,” stated a representative of the Finnish Venture Capital Association in an interview with Medita at the turn of 2023.

Author: Päivi Tervonen
COO, Leading Communications Expert, Partner

Medita Communications Ltd
ESG+D situation assessments, ESG+D strategy, sustainability communications

Published:
10.6.2024

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