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Many investors and companies see an ESG focus as reducing material risks and improving overall performance.Ridofranz/Getty Images

ESG has become a charged term.

Investors frequently consider environmental, social and governance performance as part of their risk assessments. On one side, ESG boosters suggest that concern for factors such as climate change and boardroom diversity make for better business. On the other, critics disparage metrics that they say value “woke” views over profit.

“The recent politicization of ESG in the U.S. has generated investor confusion in Canada,” says Coby Bucci, senior vice-president of corporate development at Harbourfront Wealth Management in Vancouver. “The rhetoric and ongoing debate are creating headwinds against – but not stopping – ESG investing. Investors want and deserve the choice.”

Responsible investors apply ESG calculations to complement traditional financial analysis, to avoid certain industries, to target their investments to other sectors, and to align their money with organizations that produce a social benefit. Ms. Bucci says anti-ESG messaging disregards the many ways it can be used as a tool to construct portfolios and identify material risks.

“The ‘[get] woke and go broke’ label stems from a lack of understanding of what ESG is, and fails to differentiate the nuances among ESG approaches,” she says.

No investment approach will outperform all market conditions. Ms. Bucci says the post-COVID dip of some ESG funds in 2022 “has led to short-term confirmation bias by critics.”

It can be difficult for Canadian investors to ignore the anti-ESG feelings coming from the United States. Last year, former vice-president Mike Pence claimed new ESG regulations would “allow left-wing radicals to destroy American energy producers from within.” Several U.S. states – including Texas, West Virginia, Oklahoma and Kentucky – have already adopted anti-ESG bills. This legislation forbids or significantly limits their governments from investing in ESG strategies or doing business with financial institutions that adopt specific ESG policies.

Similar sentiments have entered Canadian public discourse. Earlier this year, the Fraser Institute, a Canadian think tank, issued a report that called ESG “corporate socialism,” stating the concept threatened companies that “dissent from its mandates.”

Equating ESG with socialism is “dated and dangerous,” says Oana Branzei, a professor of strategy and sustainability at the Ivey Business School at Western University in Ontario. “This claim is not founded in logic, practice or market regulations.”

Ms. Branzei says such anti-ESG arguments aim to spread doubt: “It doesn’t have to be true to give people pause.”

If these arguments gain traction, she says it might delay further adoption of business strategies and technologies that are good for business and the planet over the long-term.

“The actual problem is not one of profitability. All indications are that ESG funds are outperforming other funds. But the politicization of ESG is a sign that it is an issue of our time, and one that can no longer be avoided, discounted or diluted,” Ms. Branzei says.

Canadian businesses appear to treat this rhetoric as white noise, and they are sticking with their ESG policies, says Alison Babbitt, an Ottawa-based partner and co-lead of the Canadian ESG team at Norton Rose Fulbright, a law firm. The corporations she works with have “recognized the benefits that ESG frameworks bring to their business, want to follow best practices, and have figured out this is a tool that flags and manages risk.”

The anti-ESG backlash indicates a need for stronger and more consistent regulations around ESG, Ms. Bucci says. “Going forward, investor demand will be supported by improved regulation and disclosure requirements, and higher ESG labelling standards. A more stringent taxonomy for transparency is welcomed and long overdue.”

In the meantime, Ms. Bucci says, “Canadian investors should feel confident that their sustainability preferences do not compromise their financial objectives. It can be a win-win.”

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