Matt Pasky of Trillium Asset Management told the Summit that fund managers have met the growing ESG demands of financial markets, especially around climate change, by ridding their portfolios of “dirty” assets such as traditional energy, mining and metals, and defence.

In a more challenging economic environment, will ESG be exposed as a post-material phenomenon destined to wither?

They have also piled into cleaner and greener technology stocks, which delivered a strong upside during the tech boom of the past decade. Now, the tech wreck on Wall Street and other national bourses, and the exclusion of soaring fossil fuels stocks, means that ESG funds will underperform.

The war in Europe has also put the spotlight on the blurring of the purpose of business behind an ESG screen. Investing in arms to send to Ukraine, or in new gas projects that might have prevented Europe’s energy dependence on Russia from continuing to fund Vladimir Putin’s war machine, now look like investments in global peace.

Conflicting demands

That raises the question whether the institutional investors who pressure corporate management always properly account for the views of the shareholders they claim to represent: an issue for the governance part of ESG.

Boards and managers of big corporations can be the target of all sorts of – sometimes conflicting – ESG demands based on vague or shifting benchmarks. Business Council of Australia president Tim Reed noted that bans on investing in prisons form part of the ESG mandate imposed on private equity by superannuation funds. But who says that privatised prisons that more efficiently deliver an essential service are bad for society?

In a more challenging economic environment, will ESG be exposed as a post-material phenomenon destined to wither?

More likely it will evolve from what corporate responsibility expert John Elkington suggested was “peak ESG”.

Resilience and regeneration

The underlying momentum will likely continue in line with the central proposition that companies that both respond to consumer demand and generally improve the societies in which they operate tend to perform better financially.

That will be reinforced by a regulatory crackdown on “greenwashing” and the push to link executive remuneration to ESG results.

Mr Elkington, who coined the term “the triple bottom line” for business, argued that a new phase of resilience and regeneration is set to begin. He says that innovative incumbents will spin off carbon-intensive legacy businesses, such as Ford Motor Company’s move to separate its old combustion engine business from its forward-facing electric vehicle business.

Avoiding a capital strike by investors applying a ESG screen was the thinking behind the failed AGL demerger, which aimed to separate its coal-fired and renewable generation into separate entities.

Having blown up the demerger, activist investor and Attlassian co-founder Mike Cannon-Brookes told the Summit that he plans to align AGL’s environmental, social and governance arrangements to achieve the world’s biggest decarbonisation project and make the company both profitable and sustainable.

Instead of divestment to avoid exposure to fossil fuels, the ESG strategy is to invest in supporting the energy transition.

Australia has grown rich exporting carbon-intensive iron ore, coal, and gas. It now must decarbonise a fossil fuel-based economy in a world headed to net zero, and this will require capital markets to fund the transition plans of energy companies seeking to seize the opportunities of the low-carbon future.

In this way, ESG “purpose” should meaningfully be married with assisting profitable companies make the transition and create Australia’s next era of clean energy-based prosperity.