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ESG is dead. Long live ESG.

The acronym, encompassing environmental, social and governance principles, has gone from the hottest finance trend to a topic best avoided at some business gatherings in three short years.

You can plot its descent through the headlines. Some Republican U.S. states, such as Texas and Florida, spent the last 18 months intensifying a battle against ESG as part of a larger culture war by barring investment managers that use sustainability-based risk management in their investment decisions. Last month, some New Hampshire GOP legislators introduced a bill that would make it a felony to knowingly invest state or taxpayer funds using ESG criteria.

Outside politics, mentions of ESG in earnings calls among companies in the S&P/TSX composite index in Canada and S&P 500 in the United States have fallen from a high of nearly 35 per cent in the first quarter of 2022 to less than 10 per cent in the fourth quarter of 2023, according to National Bank Financial and AlphaSense.

Meanwhile, green bond issues have slumped in Canada. LSEG reported last week that such financings fell to $5.7-billion last year on 14 deals, the lowest levels since 2019. That compared with $13.7-billion on 21 issues the year before. Investment into Canadian ESG funds has remained stable, but in the U.S., funds have suffered an outflow of capital since 2021 as revelations of greenwashing piled up.

So that’s it then? After a massive outpouring of pandemic-era support for using investment dollars to back the fight against climate change, fix inequities in the workplace and keep workers safe, we’re back to old times?

Not so fast. Despite the skepticism that’s spread through financial markets, ESG is not being eradicated. It is, however, maturing. Study after study shows more Canadian companies are adopting more aspects of it. In fact, sustainability reporting is set to become mandatory at some point, using international standards that are just now being tailored for our economy.

What we may see, though, is a rebranding – getting rid of the acronym and slicing up its parts as it becomes less of a separate class of investible assets and more of a series of accepted risk-management tools alongside those used in financial accounting, said Baltej Sidhu, analyst at National Bank Financial.

“Do we really need the term ESG or XYZ or whatever it may be? I don’t think so. I think the fundamentals are deeply entrenched in the global capital markets now,” Mr. Sidhu said. “The moniker has become something it wasn’t intended to be. It’s just an unfortunate outcome of what’s happened since the market-mania craze we had from the back half of 2020.”

London Business School finance professor Alex Edmans addressed the nomenclature problem in a paper he published last month, saying that some companies are biting their tongues rather than talking publicly about ESG. He proposed a solution.

Between the cheerleaders and the staunch opponents is a third group that wants to preserve some ESG principles, abandon aspects that have not proven their value and ditch the acronym. As an alternative term, Prof. Edmans suggests “Rational Sustainability.”

Granted, that may not exactly roll off the tongue. But the way he explains it, the sustainability part incorporates the idea of long-term value, which is seen as a positive for business regardless of one’s political stripe. Rationality encompasses evidence and analysis, questions whether actual sustainability is being achieved and guards against getting swept up in market crazes.

The idea is that companies would keep aspects that work, such as managing any relevant factor affecting future cash flows and improving transparency so customers can judge if their values are aligned with the organization. Meanwhile, corporations would stop trumpeting labels for aspects within ESG that can be used to mask a lack of real action, he said.

“The goal of sustainability is to create long-term value; a fund that adds ESG to its name without changing its holdings is not investing more sustainably. A fund that adds ESG to its name and changes its holdings is also not investing more sustainably if those actions do not enhance long-term returns,” Prof. Edmans wrote.

Some of these ideas will be contentious among the pro-ESG set, including those who want to add more letters to the current triptych for emphasis, such as another E for equity or B for biodiversity.

But from a business perspective, many of the risk-management tools developed under the ESG banner have value and are being incorporated into business strategies, Mr. Sidhu said.

It may not be obvious today as stubbornly high interest rates and inflation remain the top concerns of investors. But down the road, the betting is that companies that show leadership in these areas will attract market premiums, largely because they collect data that show when they could be headed for trouble from changes in climate policies or environmental penalties, or when new opportunities emerge.

“We continue to see the integration of ESG analysis and data for investors as incrementally beneficial in reducing tail-end risk,” Mr. Sidhu wrote in a recent ESG outlook. “Effectively, we are bullish about the potential of ESG and sustainability to create value and fortify long-term performance for investors.”

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