LNW 2023 Annual Impact Report Highlights a Year of Growing Pains

After years of growth and momentum that some in the industry may have taken for granted, the anti-environmental, social and governance (ESG) trend came to a head in 2023, with at least 40 anti-ESG laws added to the books in 18 states¹ and more companies distancing themselves, at least publicly, from impact initiatives that, as recently as 2020, they were happy to trumpet. U.S. sustainable funds also saw their first outflows in a decade.²

The silver lining to a year marked by challenges is that we believe this to be a natural course correction that was expected as impact investing matures and as investors, fund managers and regulators refine what impact means and how to quantify it. The increased scrutiny – by regulators and investors alike – in response to greenwashing has led to greater rigor in non-financial disclosures and sustainability-related communications, and more companies than ever are aligning their reporting with one of several commonly accepted frameworks such as those created by the Task Force on Climate-Related Financial Disclosures, the International Sustainability Standards Board (ISSB) and the Global Reporting Initiative. The ISSB standards, in particular, could be a significant step forward, as multiple countries have aligned their disclosure regulations with the standard. In addition, companies operating in Europe will soon (as early as 2024 for roughly 50,000 companies) need to be in compliance with the European Sustainability Reporting Standards (ESRS) enacted in July 2023.³ We believe that the short-term effects of this closer scrutiny and more stringent standards, in the form of fund outflows and limited growth in impact assets under management across the industry, are worth it for the long-term health of the impact investing space.

Many companies and fund managers have also gotten quieter in public regarding their ESG efforts, particularly around issues of diversity, equity and inclusion (DEI), greenhouse gas (GHG) emissions and fossil fuel phase outs. In many cases, this amounts to “greenhushing,” or companies deliberately downplaying or avoiding publicizing their sustainability practices to avoid scrutiny or feared negative response. Importantly however, companies largely have not backed away from programs like internal DEI initiatives or emissions reduction targets but have, in some cases, stopped talking about them or relabeled them to avoid backlash from the loudest negative voices. In fact, in a recent study by Littler Mendelson P.C., more than half of U.S. executives say their organizations have expanded their DEI strategies⁴ and, in an internal survey conducted by Fidelity, nine of 10 analysts said that commitment to meeting climate goals hasn’t dipped.⁵

How companies and investors have responded to this outside pressure around ESG underscores the point that the issues being addressed are, and have always been, fundamentally financially material. Recent research shows that companies with diverse teams across race, ethnicity and gender perform better. Companies in the top quartile of ethnic diversity are 39% more likely to outperform their counterparts in the bottom quartile, and the same holds true for the top quartile in gender diversity.⁶ And JPMorgan Chase CEO Jamie Dimon left little doubt of the importance of creating shared stakeholder value in his most recent letter to shareholders: “We believe — and we are unashamed about this — that it is our obligation to help lift up the communities and countries in which we do business. We believe that doing so enhances business and the general economic well-being of those communities and countries and also enhances long-term shareholder value.”⁷

In contrast, the anti-ESG laws enacted represent just a small fraction of those proposed, and those that have been rejected have faced intense opposition from many, including government pension managers and business groups, due to the bottom line cost to taxpayers. More than half of the anti-ESG bills introduced in 2023 failed, often at the urging of state officials. In Wyoming, the state’s Chief Investment Office warned that three anti-ESG bills, all of which ultimately failed, would cost the state upward of $500 million and in Texas, one of the most extreme bills quietly died after leadership at the Employee Retirement System of Texas, which manages retirement plans for public employees including teachers, told lawmakers that the bill would cost them as much as $6 billion over the next decade.⁸

In addition, despite criticism of emissions reduction targets and the green transition away from fossil fuels, investor and corporate interest has grown. A record $1.8 trillion was invested in the global energy transition in 2023, including $634 billion in electric vehicles and $623 billion in renewable energy. As of late 2023, more than 23,000 companies, representing more than half of global market capitalization, report emissions to the Carbon Disclosure Project and more than half of the largest 2,000 companies globally have set net-zero targets.⁹ More than 8,000 companies, representing over one-third of global market capitalization, have specifically committed to science-based targets such as those verified by the Science-Based Targets Initiative (SBTi), aimed at ensuring climate commitments are meaningful and scientifically sound.¹⁰

While we may be facing an inflection point for the industry, we hope and believe that it will be one that sets a solid foundation for the future and believe as strongly as ever in the importance and financial materiality of impact investing. To learn more about our place in the impact investing space and our initiatives to support all stakeholders, please see our 2023 Annual Impact Report.