The idea of “traditional ESG”, or sustainable investing, has been “sufficiently discredited” in America, says former US Secretary of State John Kerry. “You just don’t hear people talking about it anymore — not the politicians, not the business leaders.”

This comes after decades of “mockery” and “pejoratives” lobbed at environmentalists — “wokeism” is one of them — which “dismissed the notion that you ought to care”, adds Kerry, who served from 2013 to 2017 in the administration of former US president Barack Obama. “The negative took hold sufficiently that people weren’t listening anymore, or they were polarised and moved off into another camp.”

Speaking at a Lombard Odier webinar on Sept 30 titled “Building Bridges: How to rebuild trust in sustainable investment”, Kerry says the sustainable investing space now faces a necessary rebranding. “In my judgment, the narrative has to shift completely from where it was, and the morality has to perhaps translate into a question of materiality — materiality to your company, materiality to your community.”

Instead, what the investing community should be talking about are “economic fundamentals”, he adds. “We believe we have to create a critical mass of people who are focused on the economic fundamentals. Will this work based on its basic product, how fast it’s producing, where it’s going to produce and is there sustainability in that? And so, ESG probably ought to mean efficiency, security and growth.”

‘Soul-searching’ needed

There is “no doubt” that sustainable investing is “certainly a topic that is no longer as easy to discuss or engage with”, says Hubert Keller, senior managing partner at Lombard Odier.

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Speaking on a panel discussion following Kerry’s opening address, Keller lists “three issues” his team has faced when it comes to sustainable investing.

“One is around the offering, the second one is around performance and the third one is potentially an element of confusion around what ESG stands for.”

Firstly, most asset owners are multi-asset investors, and they need to deploy capital or invest through “core building blocks” to meet their strategic asset allocation needs, says Keller, who joined the Swiss private bank in 2006 after 11 years at Deutsche Bank.

“The reality is that with the exception of global equities and potentially some areas of private markets, there are still few sustainability-focused investment strategies that are core or that qualify as core. How do you sort of broaden out and scale up an offering [that] can basically become effectively a core, multi-asset portfolio?” he adds.

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Secondly, global equity strategies focused on sustainability have “by and large, in the last three or four years, disappointed” investors, says Keller. “I think we need to do a bit of soul-searching as an industry; I think we have not been helped by a very unique time in markets where effectively seven or 10 stocks have driven most of the performance.”

He adds: “But I also think that we have approached sustainability too much as a thematic thing, as opposed to something much larger… That has perhaps also created portfolio construction issues, which have led to sometimes weaker performance in the market environment [that] we face.”

Finally, Keller notes ambiguity around what constitutes sustainable investing. “Is it about additional performance? Is it about impact? Is it about box-ticking? Is it about best business practices? What really is it? As a result, ESG was so many different things that led to so many different products, with a lack of clarity on what each of these products was supposed to deliver. That would be my analysis,” he adds.

‘Over-promised’ benefits

The financial sector “fundamentally over-promised” the benefits of sustainable investing, says David Blood, founding partner at Generation Investment Management (Generation IM). “We basically said, as an industry, that sustainability was always a win-win; there were no trade-offs, and it would always result in better performance. That was simply not true.”

The underperformance of sustainable investing strategies became even more stark when the markets became “short-term oriented for some technical reasons”, says Blood, a fellow panellist at the Lombard Odier event.

“You have to decide: are you going to chase that, or are you going to continue to invest with a long-term orientation, a quality orientation? What we’re seeing now, frankly, is some number of investors who lose sight of their long-term compasses, and they begin to chase short-termism; that’s always a bad idea… because you can’t chase it fast enough and things change quickly,” he adds. “I think staying in the course will prove to be a really, really interesting investment opportunity and drive the change that we need.”

Blood co-founded his sustainable investment management firm in 2004 with former US vice-president Al Gore, along with five others. “We believe that sustainable investing is investing; we never thought that you [would] have a sustainable investing strategy and then [a] regular strategy. In fact, if we see firms [that] have two, we know that they’re actually not very committed to sustainability; it’s a marketing exercise.”

Blood hopes the industry can work to “clean up the acronyms” around sustainability. “As a dyslexic person, let me just tell you — acronyms are not good. I can’t even pronounce the word acronym, let alone understand what all these gosh darn things are.”

Sustainable investing is about common sense, he adds. “What we now need to do is get back on ensuring that people understand that sustainable investing is about best practice investing. It’s common sense; it’s about long-termism to understand that it is absolutely part of your fiduciary duty. Let’s clean up the acronyms; let’s clean up the reporting processes and let’s also begin to allocate capital.”

Engaging the Global South

For all the debate over how best to reinvent sustainable investing, where exactly are such investments headed? Conversations around the Global South — whether with regards to renewable energy infrastructure or impact investing — gained some momentum around two years ago at the United Nations’ annual climate summit, but Cara Williams worries other geopolitical priorities may have superseded them.

“I fear, with the growing sense of nationalism everywhere, that there’s less concern and there’s a risk of less mobilisation of support for the Global South,” says Williams, senior partner and global head of climate and sustainability at global consulting firm Mercer.

At COP29 Azerbaijan last November, negotiations went into overtime before delegates agreed to triple finance to developing countries from the previous goal of US$100 billion ($130 billion) annually, to US$300 billion annually by 2035.

This, however, represents just a quarter of the estimated climate adaptation costs.

Parties at COP29 also agreed to secure efforts of all actors to work together to scale up finance to developing countries, from public and private sources, to the amount of US$1.3 trillion per year by 2035, though this is a target and not a concrete commitment.

China is hoping to fill this void, according to Williams. “What we’re really seeing is China swooping in because it’s a massive investment opportunity. My big fear, as I sort of watch this, is that we are going to miss out on this great investment opportunity because of our growing nationalism and saying, ‘The Gobal South — that’s so far away. That’s really not our problem.’ Not that I have a solution for it; it’s just something that irks me on a regular basis.”

Developing countries are receiving just a fraction of the international finance they need to prepare citizens and adapt infrastructure for escalating climate impacts, according to the latest adaptation gap report from the UN Environment Programme (UNEP), released Oct 29.

According to the UNEP report, developing nations will need more than US$310 billion annually between now and 2035 to prepare for the impacts of climate change.

International public adaptation finance flows to developing countries were US$26 billion in 2023, down from US$28 billion the previous year.

If current trends in financing do not turn around quickly, the Glasgow Climate Pact goal of doubling international public adaptation finance from 2019 levels to approximately US$40 billion by 2025 will not be achieved, warns the UNEP.

“We do need to start talking about how we catalyse capital to the Global South, as the challenge of addressing the nature, poverty and climate crisis will be won in the Global South; it will not be Switzerland, it won’t be North America or the United Kingdom, so we need to understand the challenges of that — and there are many,” says Blood.

Professionals working in sustainable finance need to be “maniacally focused” on finding the business case for sustainable investing, Blood adds. “What’s the business case? Let’s prove the business case. Let’s establish fiduciary duty. Let’s clean up our self-inflicted mess, and let’s figure out how we [can] catalyse the capital of the Global South.”