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From joke to hoax, a short history of ESG

A few thoughts as 2021 roars to a close.



Reprinted from GreenFin Weekly, a free newsletter. Subscribe here.

With 2021 coming to an end, I thought I’d take the liberty of choosing an ESG word of the year. You ready? … (drum roll) … Ladies and gentlemen, introducing the 2021 ESG word of the year …


Not a surprise? A little anticlimactic even? In that case, my thoroughly unscientific selection method worked because by definition the word of the year should be somewhat obvious. The folks at Merriam-Webster, for example, chose "vaccine" for 2021, while Oxford went with the punchier "vax."

I based my selection mostly on the fact that it’s my column this week, so I get to pick.

Also, I did a Google search for "greenwashing" and "ESG," and that search turned up 35,500 results. Then I did another one for "greenwashing" and "ESG" and "2021," and it turned up 29,800 results. How accurate is this thoroughly unscientific method? Not very. Still, just scrolling through the first few pages of hits proves the legitimacy of my choice, and not in a "Yea! ESG is greenwashing-free!" kind of way.

ESG, Ethical, Green, Impact, Mission, Responsible, Socially Responsible, Sustainable and Value investing. Oh my.

A few representative headlines: "Regulators intensify ESG scrutiny as greenwashing explodes," "Many green funds don’t live up to their claims, report finds," "ESG investing needs standards to prevent fraud and greenwashing." Then there’s this one, dating all the way back to July: "Greenwashing biggest challenge of ESG investing, say institutions."

That last headline provides even more supporting evidence for my selection. It refers to a global survey of 750 institutional investors done by Schroders, which asked them to name their top challenges when selecting sustainable investments. Cited by roughly 60 percent of those surveyed, greenwashing came up more than anything else.

What's in a name?

Greenwashing was coined by environmentalist Jay Westerveld in 1986, although the term entered the ESG vernacular far more recently. Probably because it didn’t become a problem in ESG-land until far more recently. Back in 2014, when I first started writing about what people were then calling socially responsible investing (SRI), no one talked about greenwashing.

This was a moment when sustainable investment labeling sucked up much of the air in the room, and it seems almost quaint today. Here’s how Lisa Woll, CEO of the Forum for Sustainable & Responsible Investments (US SIF), began the foreword for the organization’s 2014 report on market trends:

What’s in a name? ESG, Ethical, Green, Impact, Mission, Responsible, Socially Responsible, Sustainable and Values are all labels that investors apply today to their strategies to consider environmental, social and corporate governance criteria to generate long-term competitive financial returns and positive societal impact.

This paragraph is casually informative, but there really was a lot of handwringing about the labeling thing. The proponents of sustainable investing were forever playing defense, forever in persuasion mode, trying to convince the naysayers of ESG’s merits. And the naysayers at the time enjoyed complaining about all the names and acronyms and what did this alphabet soup even mean? Funny how a few little letters can cause so much confusion among graduates of Wharton and Columbia.

Snark aside, another far more important conversation was taking place then, one you couldn’t miss if you happened to attend a sustainable investment conference or read even an occasional report or news article. That conversation centered on demand. Which explains why, if I had to choose an ESG word of the year for 2014, or 2015 or 2016 … it would be "millennial."

Once again in persuasion mode, ESG proponents spent any time they weren’t fretting about labeling trying to convince everyone else that these newly anointed most important people in the world called millennials really did care about environmental and social issues and wanted to align their investments with said values.

This turned out to be true and other generations followed, but early ESG and impact investment adopters inside the financial industry often told me back then how difficult it was to convince their colleagues to climb abord the millennial-powered ESG train. Once it became clear the train really was leaving the station, naysayers said they didn’t believe the "hype." This was after they said sustainable investment would never be more than a niche, or a joke.

Case in point, consider this email I received in May 2015, from an editor I freelanced for regularly back then. The subject line: "You still want to write that tree-hugger story?"

This editor’s publication served an audience of financial advisers, and I’d been pestering him for months to let me write the millennials-and-SRI story.

"At one point you mentioned [the story’s] overall theme might be, 'this is important, and advisors are lagging,'" his email went on. "Which is fine as long as you can make the case that it really is important and not just something hippies talk about while they listen to old Grateful Dead records."

That attitude was not at all unique. Not that I would ever begrudge a journalist or an investor their right and duty to view the world with healthy skepticism. Still, there was always that little touch of unnecessary mockery thrown in. And this general attitude persisted even after a decent number of ESG funds built a worthy track record.

Let me share a personal example. After I began freelancing, I decided that if I really cared about social and environmental issues I should walk the talk, just as I would expect the companies I write about to. So, I rolled my meager 401(k) stash into an IRA managed by a longtime ESG player, with just over 70 percent in equities split between two ESG funds. The largest share is in a low-carbon-strategy fund benchmarked against the Russell 3000, with top holdings such as Microsoft, Tesla, Procter & Gamble and Disney. Over the last five years, it has returned just under 17 percent, moderately beating the index.

Is this fund perfect? No. There are a few companies in there I could do without, but I’m not a purist. As for performance, moderately beating the benchmark suits me fine. And, by the way, 17 percent is perfectly respectable.

Somewhere along the line the narrative shifted from "ESG doesn’t drag down performance" to "ESG outperforms like crazy but only because of other unrelated stuff or because they’re lying to you about what’s in it." True, you do have to watch these Wall Street types. Fortunately, the regulators appear to be on it.

All of which makes me wonder: Does anyone else look at ESG’s surreal evolution and think, "Really? This touchy-feely do-gooder thing that couldn’t possibly make money has become so attractive to banks that they actually started grabbing funds and just slapping ESG labels on them?"

My point being that yes, ESG has big problems and investors have greenwashing, messy metrics and a lack of transparency to contend with. But as we enter the still Wild West of ESG 2022, as my colleague Joel Makower rightfully called it last week, it might be helpful to remember:

  • If investors weren’t integrating ESG into their investment choices, they wouldn’t care about metrics or transparency.
  • If there were no demand for ESG, there would be no greenwashing.
  • Hence, a large enough segment of both individual and institutional investors — clearly not everyone, but definitely enough people — not only care about environmental impact and risk but are willing to put real money on it.

And that, my hippie friends, is what progress looks like.

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