What is ESG?

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ESG is at a crossroads: on one hand, investing in climate tech has been growing exponentially for the past decade. But lately, a backlash has emerged as well. The rising volume of anti-ESG policies among some political conservatives has diminished more vocal support among investors and brands who have made sustainability a cornerstone of their growth strategies.

Nevertheless, Reuters has reported that temperatures in July made it the world’s hottest month since records have been kept. As climate change and its effects become more pronounced, the need for business across all sectors is likely to keep demand for climate tech and ESG policies even higher. 

But let’s unpack what ESG is and what it means for investors, entrepreneurs, tech companies, and brands.

What Is ESG?

The acronym “ESG” stands for “environmental, social and governance. The concept of investing in ways that led directly to social benefits began in the 1960s. In those days, investors sought to curb the harmful effects of smoking by placing downward pressure on tobacco companies’ stocks. Others sought to dismantle South Africa’s apartheid regime by shifting money away from companies doing business in that country. 

But for the past decade, as the environmental movement focused on global warming, ESG investments tended to tilt support to eco-conscious “green technology” and startups creating climate tech businesses.

This shift towards "fossil-free investing" is typically positioned as a “win-win,” promising both financial returns and positive environmental impact. However, the reality is more complex, and the ESG landscape is fraught with challenges — and potential greenwashing.

What Is Greenwashing?

Investors, including climate tech startups, have increasingly turned to ESG funds to support causes they care about while seeking returns. The allure of ESG funds lies in their promise to promote environmental sustainability, social responsibility, and sound governance. This aligns with a broader trend of consumers seeking brands that genuinely embrace sustainability and climate change mitigation.

The demand for ESG funds has surged. Segments touting "low carbon/fossil fuel-free" and "environmental" funds attracting billions in investments. Investors view ESG-focused investing as a way to encourage cleaner and more equitable business practices over time. 

Despite the surge in ESG interest, there's a significant challenge: greenwashing. Greenwashing occurs when companies or funds falsely portray themselves as environmentally friendly or socially responsible. In the context of ESG, this often involves misleading claims in prospectuses and marketing materials.

The problem arises because ESG funds aren't always as "green" as they seem. 

The SEC allows ESG funds to use certain "wiggle words" that can mislead investors. For example, some funds labeled as "fossil-free" can still have up to 20% of their holdings in energy companies like Exxon, Chevron, and Shell. This lack of clarity in defining "free" in the context of fossil-free investing can mislead investors.

The all-too-common appearance of greenwashing has created something of a “lose-lose” dynamic in contrast to ESG’s more genuine aims. Consumers and investors who wish to support ESG efforts feel disillusioned and cynical when an investment prospect turns out to have engaged in performative greenwashing. Meanwhile, ESG’s opponents are all too quick to strike an “I told you so” stance.

Good Intentions, Bad Outcomes

Brands are also affected by this lack of transparency. In an era where consumers demand proof of brand values and purpose, greenwashing can harm a brand's reputation and credibility. Brands that genuinely embrace sustainability practices may find their efforts overshadowed by those making misleading claims.

This pressure forces brands to align their principles, intentions, and words with their actions. It's no longer enough to claim sustainability; brands must demonstrate it. Brands are increasingly held accountable and must avoid associations with fossil fuels. Some funds are proactively divesting from these industries to align with investor demands.

Climate Tech Changes Everything

All in all,  investors should take note: brace yourselves for a forthcoming surge of climate tech startups.

Anecdotally, every week I see a former ad tech leader trade in programmatic targeting reports in favor of the executive version of a “green job.”

Earlier this summer, TechCrunch looked at the apocalyptic weather patterns that motivated numerous founders to abandon their previous careers and establish companies dedicated to addressing the climate crisis.

Data from TechCrunch supports this anecdotal evidence, as the chart below outlines:

After historically devastating fire seasons in 2018 and 2020, the West Coast witnessed a remarkable rise in climate tech startups. Analysis of PitchBook data on accelerator, angel, and seed rounds shows a 50% increase in climate tech companies launched in 2019 compared to 2017, surpassing the 33% growth across all sectors. The trend continued with an 83% surge in 2021 compared to 2019, more than double the rate for all startups at the same stage.

Calling for Clarity and Transparency

To address the challenges directed at ESG tech startups, investors, and brands, the best response is greater clarity and transparency. ESG funds must be transparent about where investments are directed and what industries they support. Brands and entrepreneurs need to be clear about their goals and just how far they’re going in achieving them.

Any connection to or use of fossil fuels should be explicitly stated, ensuring investors and consumers have a clear understanding of funds’ and companies’ actions.

ESG funds that deliver on their promises of being "fossil-free" or environmentally focused are likely to attract investor dollars. In a crowded market, clarity and genuine commitment to ESG principles set successful brands and funds apart.

Despite the backlash and the hits many investors, startups, and brands have had to absorb, ESG’s centrality as an investment, economic, and branding guidepost remains solid. And the concept’s original ethos of "doing well by doing good"is poised to transform the shape of economic growth — all while saving the planet.

Greg Kahn 

Emerging Tech Exchange
Founder & CEO