It has become trendy for bankers, investment managers and corporate executives to declare that ESG’s time has come and gone. But attendees last week at the world’s largest responsible investment conference say there’s more to the story.

Principles for Responsible Investment (PRI) counts more than 5,300 companies as members, together managing assets of more than US$128 trillion. Pension executives at the PRI in Person gathering in Toronto said they had no problem upholding environmental, social and governance approaches to investment. In fact, it’s the only way they can secure long-term payouts to their plan members. “We have fully bought into the thesis that we can generate outperformance by leaning into the climate revolution,” Michael Cohen, chief investment operating officer at CalPERS, the US$529-billion fund for California public employees, told the conference. The fund intends to double its climate investment over the next six or seven years.

Bertrand Millot, head of sustainability for the Caisse de dépôt et placement du Québec (CDPQ), Quebec’s $450-billion pension fund, said earning a good return is critical to safeguard pensions in the province, which are paid to six million Quebecers. “We are a fiduciary, and returns are number one, and always will be,” he said. The CDPQ divested from the oil sector five years ago and reinvested the funds in clean energy, a move that has generated an 18% annual return. “We are very happy to be out of the oil sector,” Millot said.

The keynote address came from Canada’s finance minister and deputy prime minister, Chrystia Freeland, who announced a plan for labelling green and transition investments. The new rules are expected to boost ESG- and climate-related investment in Canada, such as clean energy bonds and transition bonds for sectors like steel and cement.

The gathering took place amid a wider financial industry rift caused by mounting doubts surrounding the effectiveness of ESG investing, particularly on climate action – doubts that have been sowed mainly by large asset managers, such as BlackRock CEO Larry Fink, who has stopped using the term “ESG,” saying it has been “weaponized” by the far left and far right.

Asset owners, on the other hand, are intensifying their ESG commitments. Pension funds own some of the world’s largest, most significant long-term assets. They have the power – if they choose to exercise it – to allocate trillions of dollars to the global climate transition. “We’re starting to see a real split in the financial sector,” says Adam Scott, executive director of the Canadian climate action group Shift: Action for Pension Wealth and Planet Health.

“Pensions have long time horizons on their investment, so they’re starting to come around to a deep internal recognition that they have to hit climate targets or invest in that direction,” he says. But banks, Scott points out, have relatively short-term lending horizons: “They don’t see past a few quarters when it comes to allocating their loan books.”

A new report on fossil fuel loans and investments by Toronto-based financial institutions underscores Scott’s point. Released during the conference, the report found that financed emissions by six banks, six asset managers and six pensions totalled 1.44 billion tonnes of carbon dioxide in 2022. Of those, the pension funds were responsible for less than 10 million tonnes.

To be sure, there are still hundreds of asset managers and banks that are fully committed to ESG and climate investment, many of which belong to PRI and other climate coalitions for investment managers and bankers.

But some of the world’s largest asset managers have recently sent signals that they want to lower expectations for their ESG and climate action. This year, JP Morgan Asset Management, State Street Global Advisors, PIMCO, Goldman Sachs and others withdrew from the Climate Action 100+ network, a coalition pressuring leading global companies to set climate targets and plans.

Banks and asset managers have faced growing hostility from Republican lawmakers in the United States who have called ESG “woke capitalism.” In August, Republican members of the House of Representatives sent letters to 130 U.S.-based investors inquiring about their involvement with Climate Action 100+ and asking them to explain their ESG goals.

Can finance force change?

Last month, the Institute of International Finance – a trade group representing asset owners and investors – issued a paper calling for a reset on the role of private finance in the net-zero transition. The authors identify a “prevailing finance-centric theory of change,” which assumes that banks and investors can force change in the “real economy” by shifting their assets from high emitters to low emitters.

But this theory fails to acknowledge the degree to which financial entities are limited by the commercial viability of the projects and customers they finance, the paper argues.

This off-loading of responsibility echoes recent statements by energy and resource company executives who say that phasing out fossil fuels is a fantasy. The wars in Ukraine and the Middle East are creating turmoil in energy markets and driving up oil and gas prices, making them a more attractive short-term investment.

The “ESG pendulum had swung back in the past year,” Glencore CEO Gary Nagle said in August after the mining giant cancelled plans to spin off its high-CO2-emitting but very profitable coal business.

Don’t call ESG dead

In contrast, asset owners are expressing a growing confidence in the importance of climate and ESG factors. Last month, a survey by the financial index company FTSE Russell found that 86% of large asset owners (with assets of US$10 billion or more) and 63% of small owners (less than US$10 billion) are incorporating sustainability considerations into their portfolios. A similar survey by Morningstar found that 67% of asset owners said that ESG factors have become more important in selecting investments than five years ago.

Owners are also increasingly recognizing the connection between ESG and fiduciary duty and allocating more assets under ESG considerations, says Tom Kuh, head of ESG strategy for Morningstar Indexes. “It runs counter to the narrative that ESG is dead.”

UN climate envoy Mark Carney, who together with New York business tycoon Michael Bloomberg founded the Glasgow Financial Alliance for Net Zero three years ago, laid out a hopeful alternative to the prevailing financial pessimism among bankers and investment managers at the conference: “When society sets a clear goal, such as net-zero, it becomes profitable to be part of the solution and costly to remain part of the problem.”

“You’re the first generation of investors who understand the risks associated with climate change, but you are also the last generation who will be able to do anything to mitigate climate change,” he said.

The climate transition will happen only with both private and public action, said Barbara Zvan, chair and CEO of University Pension Plan in Ontario. Pensions have a fiduciary duty to pressure politicians and regulators for climate transition policies, she argued. “There is value in working together to get into a consensus and then staying steadfast to it,” said Zvan, who led the lobbying effort for the new green taxonomy that Freeland announced at the conference.

Millot said the most important thing for the finance industry to do is to get away from backward ways of thinking and look forward, even if the data is unavailable or uncertain. “The planet is on a path where there is no crystal ball. Companies are going to do projections and make suggestions that are more or less correct,” he said. “We need to really get comfortable with that.”

Eugene Ellmen writes on sustainable business and finance. He is a former executive director of the Canadian Social Investment Organization (now the Responsible Investment Association).