Too Much ESG, Too Little Impact

IN THIS PUBLICATION

• "ESG" investments are now over a third of global AUM, growing at over 30% YoY for the last 5 years.
• ESG is booming, but only a small portion of capital is being channeled towards impact, the real sustainable segment of the market.
• We believe that better communication and disclosures can solve this.

The State of ESG Investing

There is a lot of momentum in the ESG space.

Assets labeled as ESG have been growing at over 30% per year for the last 5 years (compared to global AUM growth of 7% per year over the last 4 years), and are expected to be over a third of global AUM by 2025. During Q1 and Q2 of 2021, ESG ETFs inflows in Europe represented over 50% of the total inflow on the continent, compared to 22% in Q2, 34% in Q3, and 46% in Q4 2020.

In the private equity space, over 95% of managers have implemented or are implementing some form of ESG practices at the firm level. Pitchbook's global VC fund survey in 2021 showed that 58% of VC managers offer some form of impact investing, with another 17% considering it. When so many fund managers are already ESG compliant, maybe it's the terms of compliance that are a bit too loose?

There's a ton of inflows and initiatives in the space, most of which are being channeled towards mandates that are effectively bullshit. The real problem with this greenwashing is that we might miss the opportunity to actually allocate capital towards initiatives that deliver real returns, financially, environmentally, and socially. Missing this opportunity will both hurt investors and fail to deliver the changes we (funds, governments, society) set out to implement in the first place.

Our suggested fix? Actually labeling the funds correctly, which matters more than you might think.

The State of Impact Investing

Early in our work around sustainable finance, we explained the spectrum that investors should refer to in order to properly understand the different buckets within the sustainable finance space: