Lauren Taylor Wolfe says it’s just too risky for investors to ignore

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According to Deloitte, global ESG assets under professional management could be worth $80 trillion by 2024. But this growth in popularity combined with a global energy crisis has the sector facing increasing polarization. Critics worry that capital dedicated to ESG investments will further one value system at the expense of others. 

Lauren Taylor Wolfe co-founded Impactive Capital, an activist investment management firm focused on ESG investing for the long run. She sat down with CNBC’s Delivering Alpha newsletter to share why she thinks bans on ESG investing could be too risky and how understanding environmental, social, and governance risks is ultimately good for businesses.

(The below has been edited for length and clarity. See above for full video.)

Leslie Picker: Are you surprised that ESG has become one of the more controversial areas of finance in recent months?

Lauren Taylor Wolfe: No, I’m not. Listen, ESG without returns is simply not sustainable. There have been hundreds of billions of dollars allocated in the U.S. alone to ESG-specific ETFs and actively-managed mutual funds. On a global basis, there have been trillion[s] allocated. And like all trendy things, sometimes the pendulum swings too far in one direction, and so, now there’s been a lot of scrutiny on a lot of ESG products. But again, not every ESG product is created equally. As I mentioned before, without returns, these products simply won’t succeed. Now at Impactive, we take a different approach. And we’ve proven that you don’t have to sacrifice returns to achieve good, strong ESG improvement. We think about two things: one, can you address a business problem with an ESG solution? And two, can this solution drive profitability and returns? We’ve seen a lot of pushback come from some politicians and I think that’s simply too risky. Understanding environmental risks and social risks is simply good fundamental analysis and it’s simply good investing. So, for states, for instance, to ban this type of investing, I think it’s simply too risky. It’s bad for pensioners, it’s bad for constituents, because it’s simply a good way to analyze a business over the long run.

Picker: I think at the heart of the issue is this idea of ESG and profitability being mutually exclusive. Do you think there can be ESG improvements that drive margin expansion right away? A lot of people say, “Oh, well, over the long term, this will be much better for the company.” If you are a fossil fuel producer over the long run, transitioning to green energy will be better for your survival. But if you’re a pensioner or one of the investors that need more of a short-term time horizon in terms of making, hitting your marks on an annual basis, you kind of need more of a quick turnaround there. Is it kind of a matter of duration in terms of the ability to drive that profitability?

Taylor Wolfe: We focus on two areas, the ESG impact and the capital…