At the PEI Forum in New York in early March, a senior representative of one of the biggest European asset owners was asked on a panel about how they dealt with the ‘bans’ on ESG and DEI in the US. In response, they explained a recent phenomenon:
We will continue to ask for responsible investing reporting and do our responsible investment due diligence with all our GPs. That will not stop. […] What we suggest our GPs [investors] do is be transparent with their other LPs. Ask them: we are doing this [reporting] for [this big European asset owner]. We can send this to you if you want or take you off the update list. That is up to you.
What the LP described is what I would call selective green-hushing: the action (and reporting) continues but you choose not to tell everyone about it – only those that want to know.
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With a never-ending flood of executive orders, lawsuits and press conferences, US President Donald Trump and his team have been scattering everyone’s attention since his reelection. Responses have been adrenaline-fueled, often lacking clarity and substance. The continuous attacks have also induced fear – always worrying about what and who is next.
Many of the attacks in ‘our ecosystem’ of venture capital and finance have run along one of two lines: taking ESG and DEI into account is discriminatory and/or leads to violations of fiduciary or shareholder duty and antitrust laws. Orders and court decisions will continue and flip-flop, often dependent on a given judges’ political ideology.
What we need to avoid is letting this continuing threat and instability freeze action. Selective ESG/DEI/green-hushing as proposed by the LP at PEI is one way to prevent this.
Materiality is the first keyword in this tactic.
Step back, reflect and focus on what is material
With their private market portfolios, asset owners – in the US and elsewhere – are not driven by political or indeed stock market cycles. The big pension funds and state funds and insurances and endowments invest for the long term. Risks such as those caused by climate change and the energy transition – both deeply enmeshed with the AI craze and its never ending hunger for more power and computing resources – are material within those investment horizons.
Politics doesn’t change these risks – it can only pose another set of material risks in the form of what is often called geopolitical (and economic) instability. Uncertainty in this area, that has already been shaken by continuing conflicts in Ukraine, Gaza and other parts of the world, is yet another factor to add to our ongoing non-financial risk analysis.
The key question for asset owners, asset managers, GPs and companies alike remains: what is material for my company or investments, operating in this particular geography, with this business model in this sector right now and tomorrow?
Do you continue to struggle with employee retention? Focus on the right kind of inclusion programs to keep costs down and increase satisfaction. Are we planning on building new factories in Brazil and Indonesia? Do an environmental and climate impact assessment to suss out the right location taking into account all stakeholders. Does the market for our generative AI solution naturally grow into Southern Europe? Make sure you have access to enough (cheap renewable) energy to power your engines. Are you investing in dual use technologies looking at selling to militaries and civil actors alike? Ensure that you governance mechanism includes strong processes and skill sets to be agile, forward-looking and responsive in this sector.
You do not have to call this ESG or sustainability – even though we would – but these risk factors are essential for your decisions. You want to set up your processes to be able to identify, analyze, and prepare for such current and emerging risks for the sake of your financial bottom line. Control what you can control.
Drop the green washing, long live green hushing
We were rightly concerned about ESG- and green-washing over the last years with companies claiming to do more than they were actually doing. Lawsuits and fines and regulation against big banks, including Goldman Sachs, started to act as effective deterrents for this marketing-driven practice.
What has so far been less of a concern is the opposite practice: doing responsible investing without the spin. Many conversations over the last month across the spectrum of capital providers and corporations have shown that hushing on all fronts – from DEI and ESG to climate investing – might become the new normal, at least in the US.
A look at asset owners more broadly makes the viability of this tactic even more clear. As VentureESG’s recent white paper based on interviews and survey responses from 30 institutional LPs shows that the European LP at PEI was not alone. Many of the big check writers are doubling down when it comes to responsible investing – but in the US, many of them will be ‘hidden champions’.
The rationale is clear: responsible investing makes financial sense as a risk management and value-creation tool for investors across asset classes with a mid- to long-term time horizon. Dropping it would have negative financial impacts.
Overall, this kind of practice might lead to positive outcomes. Responsible investing has to be focused on material issues if it isn’t driven by the desire to position oneself and tell a good story. Perhaps that is a silver lining, after all?
Johannes Lenhard is co-founder and CEO of VentureESG, which contributes a regular column ImpactAlpha’s ESG in VC series, and ImpactAlpha LP/GP newsletter.
