ESG investment is here to stay

I wrote an article last month chronicling the rightwing-led backlash to ESG.  Pouring corporate resources into ESG, the theory goes, diverts attention from the basic blocking and tackling involved in making money.  There is ample research proving the opposite, but you don't have to read studies by eggheads to appreciate that the market itself is saying the opposite. 

ESG investing is resilient even in a bad economy, and if that's not enough, no less an authority than the New York Times wrote an article today about "decarb bros", which it describes as "a loose affiliation of mostly young researchers, climate tech workers, policymakers and people following along online" (not all necessarily male)  who believe that there are viable technology-fixes to climate change that need only be invested in and deployed.  The movement is further described as rejecting the "doomerism" and "wonkiness" that permeates traditional discussions of climate change.  They are here to say that climate tech can be fun and lucrative!

Normally, the moment I read these kinds of puff pieces, I assume that the trend is dead or declining rapidly.  For example, in 2008, when I heard that the mother of one of my kids' elementary school classmates had quit her government job to start flipping houses, I knew the real estate market was in for a crash.

But apparently not so with ESG-related investing, or at least there appears to be a long runway ahead. According to McKinsey, the sector appears to be resilient even in the face of broad economic downturn: growing 7% in 2022, to a total of $200 billion.  The US Inflation Reduction Act (IRA), passed last year, allocates more than $370 billion in climate change funding.  The "EU Green Deal" could potentially dedicate more than €1 trillion more. Together, these measures may open up more opportunities for investors in a market that McKinsey estimates could reach $9 trillion to $12 trillion in annual investment by 2030.  When smart, professional VCs who are otherwise keeping their powder dry continue to invest in climate tech, it appears that they may know something the rest of us are not.

The key to much of this will be tied up in the value of carbon emissions, or carbon offsets.  At present, there are so-called compliance and voluntary markets.  The latter is still coalescing around standards of accounting, and to some degree even science.  Moreover, it remains vulnerable to the whims of regulators and litigants.  A major perturbation could upset the investment expectations of thousands of investors.  For example, if the models foresee a price of $100 per ton of carbon in 2030, what happens if the price skyrockets to multiples of that?  What happens if the price is half of what was predicted? The former scenario involves hundreds of companies missing carbon pledges -- cue the lawsuits. The latter means a lot of unhappy investors.  All of this counsels a light touch on regulation that does not result in the need to reprice deals and deter investment..