Conscious investing: Why now? Why still?

Coming off of a decade marked by record growth, it’s fair to say, environmental, social, and governance (ESG) investing has broken through the mainstream. Consumers, and the businesses and politicians that serve them, have all become more focused in recent years on addressing environmental sustainability, social justice, and corporate governance problems.

The rise of ESG into mainstream consciousness, at a corporate and consumer level, has propelled sustainability-minded investors to pounce on a new wave of previously untapped opportunities.

Look no further than 2021 – a record-breaking year for ESG investing. As countless consumers, corporations, and policymakers began prioritizing ESG, $649 billion¹ flowed into ESG-focused funds. In fact, starting in the 2023-2024 academic year, the Wharton School of Business will begin offering a major in Environmental, Social, and Governance Factors for Business (ESGB) for its MBA students – a development that both reinforces the dramatic inroads ESG has already made while pointing to ESG’s larger, here-to-stay relevancy.

So, it’s clear that ESG continues to take off and gain more widespread acceptance.

But there’s still a long way to go. The foundations for conscious investing are in place, but the ESG landscape remains far from perfect. Data monitoring and corporate reporting, for example, requires further refining and greater standardization, while the definitions surrounding ESG and its related sub-topics need to be better aligned and more universally understood.

As things stand, ESG’s prevailing popularity now comes with increased opposition, namely in the form of anti-ESG political pressures – with critics questioning how ESG principles align with shareholder value. With conscious investing trickling into the political arena and finding new legislative resistance, here’s where things stand:

The emergence of ESG’s political fault lines

Many issues have become politicized recently, and ESG is no exception. As ESG investing has risen in popularity, so too has the anti-ESG, or “anti-woke,” investment movement. Tension around ESG is increasing worldwide and perhaps beginning to reach a new boiling point in the U.S.

The politicization of ESG in the U.S. has given way to a growing partisan divide split across state lines. Various state legislatures have adopted legislative proposals in protest against ESG. For example, in 2021, Texas mandated its municipalities to boycott banks² with ESG policies against fossil fuels and firearms. As a result, Texan municipalities can no longer turn to many prominent financial institutions for their underwriting needs.

This kind of restrictive legislation unsurprisingly comes at a cost to municipalities and taxpayers, alike. In this case, Texas cities will now need to pay between $303 million and $532 million extra in interest (on $32 billion in bonds) according to estimates³ . After all, municipalities will no longer be able to use their go-to banks and underwriters – forcing them to negotiate new borrowing terms with the remaining financial institutions, which now face far less competition within the state.

Texas might be the most high-profile state to enact anti-ESG legislation, but it’s far from the only one. Arkansas, Kentucky, Oklahoma, and West Virginia are just a handful of the other states to follow suit and enact similar legislation targeting financial institutions with certain ESG policies. In total, seventeen conservative states⁴ have created new bills or laws that restrict financial institutions with certain stances on diversity, climate change, abortion, and gun control. Moving forward, this form of political pushback figures to continue via public financing and state-level anti-ESG policies.

Why green investing still matters

There’s no denying ESG investors took a short-term hit in 2022 – so too did the rest of the market.

In the long-term, however, which has been the view of savvy, value-based investors, conscious investing can be a win-win for all – across the board and across the aisle. Not only can ESG-focused investing improve our world, ultimately making it a better place to work and live, but it can also generate sustainable stakeholder value.

Take the real estate industry, for example. Developing affordable green housing can benefit both residents and investors. Residents can enjoy high-quality, energy-efficient homes ready for the future, while investors may see returns quickly. The EPA estimates[⁵ that most energy efficiency strategies will generate a 2.1-year payback (or better) on cost and offer nearly a 50% return on investment⁶ .

Similarly, the natural gas industry has plenty of room for sustainability and profit. By paying to seal methane gas leaks, oil companies can protect the environment from significant air pollution and potentially triple their ROI⁷ in just one year. On the other hand, companies that refuse to seal gas leaks or wait until the last minute risk causing further environmental damage and missing out on potential profits.

Examples like these highlight how, under a long enough time horizon, investors can actually seek to reduce risk and increase their returns by participating in conscious investing. After all, from a performance standpoint, the MSCI ACWI ESG Leaders Index has regularly outperformed⁸ the broader MSCI ACWI index, suggesting room for potential returns.

When it comes to conscious investing, some reject it because they’ve seen one too many greenwashing scandals and are wary of ESG investments. Others claim that prioritizing the environment, diversity, and other social problems is not a profitable investment or corporate strategy.⁹

The bottom-line? Socially conscious investing and profitability are not mutually exclusive. The idea that ESG investors sacrifice ROI for a socially conscious agenda remains a fallacy. After all, investments made according to ESG principles typically protect investors from a sequence of risks that can arise from poor corporate governance, climate change, and human rights issues. Conscious investing, at its best, can minimize investors' exposure to long-term risks without sacrificing ROI.

Conscious investing for future returns with AXA IM

As a long-term active asset manager, AXA IM believes in the importance and value of conscious investing. Amid a broader backdrop of short-term market volatility, a number of structural trends and larger macroeconomic forces – including the growing demand for sustainable energy – actually point to the potential for a strong ESG outlook in the long term.

While the world is still reliant on fossil fuels, for example, the energy transition remains well underway. Conscious investing provides investors a route to participate in the energy transition and leverage the ongoing development of the clean economy.

When it comes to conscious investing, we believe in humility and transparency with our clients regarding AXA IM’s ESG disclosures and long-term commitments. We help clients understand how conscious investing strategies can make sense from a value and value-based perspective.