In July, BlackRock CEO Larry Fink warned that we should worry more about the cost of meals than of petrol. The climate change crisis has developed cost-of-living risks and complexities that are now skewing the focus on, and indeed changing, environmental, social and governance (ESG) issues that dictate investment directions. In other words, the meaning of ESG is shifting.

So what does this mean for investment management firms?

The ultimate cost-of-living crisis

Investment firms are under more pressure than ever. “The key to navigating is to conduct a rigorous materiality assessment to determine which aspects of climate change are most relevant to the firm,” says Karl Mallon, Climate Risk Analyst and CEO of firm Climate Valuation.

“Take net zero,” adds Sandy Trust, Director of the Sustainable Finance Transformation team at Ernst & Young LLP. “Active investment managers need to make investment decisions that align with the mandate of the fund and their clients’ needs and are used to thinking about financial risk and return.”

Can you have your (expensive) cake and eat it?

So, what funds offer the best returns while delivering on ESG credentials, and is it possible to have both? “My personal view is that over the long term, investing in areas that are likely to see significant growth, such as batteries, renewables and alternative protein, is likely to yield outperformance,” says Trust.

“This has often benefited entities with a perceived lower-carbon profile – tech, banks, property,” says Mallon. “However, shifting capital will not in itself solve underlying ESG problems, there’s maturation around data and impact measurement still to occur.”

The best, more enlightened, investors not only consider how ESG risks and opportunities might impact the value of the companies they invest in, they also realise the inherent creative force of capital.

Highlighting greenwashing

Another question is whether greenwashing is now becoming more problematic as oil and gas companies’ profits rise.

“Greenwashing is an important and hugely difficult topic,” admits Trust. “One of the difficulties here is that an assessment of sustainability requires both position and direction, ie, on the carbon dimension, I need to understand the emissions of a stock today but also its direction on net zero.”

Over the long term, the best ‘real returns’, adjusting for inflation, will only be achieved by balancing financial returns with investment in a sustainable future.

“The alternative is a bag full of money which you can no longer spend, in a dystopian hothouse future not worth living in,” concludes Kaisie Rayner, a sustainable finance practitioner and founder of website A Future Worth Living In.

Read more on this subject from the Financial Services Faculty at: Investment management and dynamic ESG