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Change is the only constant

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By Markus Müller

· 6 min read

Over the last few days, or more accurately nights, I’ve been reminded of the concept of “shifting baselines”. In Frankfurt you can hear birds singing at night. The reason is noise pollution: as a result, birds now have to signal at night to find each other. What does this have to do with shifting baselines? A child born today may grow up to see this changed bird behaviour as normal, whilst we see it as abnormal.  Shifting baselines can be viewed as good or bad: They can make humans resilient to change, but they are also dangerous if we don’t focus on mitigation and avoidance.

Sustainable transformation involves constant change – in our actions, knowledge, even how we define the underlying problems. One example of the latter is provided by this week’s EU guidelines for ESG-named funds. I welcome this development as it helps to create a measurable standard for what is regarded as ESG and what is not. Even if SFDR (the Sustainable Finance Disclosure Regulation) was based on good intentions, it also introduced ambiguity, and so an overhaul was needed.

The Paris Aligned Benchmark, which is a cornerstone of the new ESG Funds framework, has an undeniable consideration of the environment in investment decisions. But in a welcome development, it includes the realistic view that companies in transition also need to be included in the journey.  To me this shows that we are moving into a different phase in the ESG “cycle”.

Debate: where are we now in the ESG cycle?

In a report we published in 2022, we argued there had been three phases in ESG investment: acceptance, then rapid growth, then consolidation and reorientation. I reckon that in 2024 we are now entering a fourth phase – reassessment. By this, I don’t mean a reassessment of the overall need for financial action on the environment – we can see the reasons for this in the world around us. But we probably need to reassess the basic scope and regulatory framework for ESG investment over the medium term. “Scope” questions might include, for example, whether or not ESG should continue to exclude defence investments. “Regulatory” questions include how best to encourage investment in the transition process itself – note for example the recent pushback on EU sustainable finance disclosure regulation from some asset managers, who think it makes sense to include high-carbon energy firms transitioning to renewables.

Where does this reassessment phase leave companies? I think the need for corporate engagement with ESG will remain and probably increase. In terms of public perception, the reassessment phase will be an opportunity for companies to present themselves as sector leaders, well prepared for future change – and thus worthy of higher stock market valuations. Within companies, ESG engagement should help encourage internal dialogue about boosting efficiency and reducing future risks – again, good for a company’s financial health.

Investor perspective: sustainability and corporate earnings

The Q1 earnings season has unfolded with a notable emphasis on sustainability factors. Key areas of interest have included energy transition as well as sector-specific challenges and advances in sustainability practices (with a particular focus on supply chains). Companies have highlighted their ESG commitments in their earnings reports, in response to regulatory changes and/or investor expectations. All in all, we have seen 61% and 77% of companies beating earnings expectations across the STOXX 600 and S&P 500 so far, reflecting a slowing yet growing corporate sector.

I’d pick out four areas as of particular interest. In the energy sector, looking through very mixed Q1 earnings numbers, we can still argue that companies actively investing in renewable energy and sustainability projects are generally seeing long-term value appreciation. The same is also probably true of utilities, despite a tough Q1 relative to the overall market.

In other sectors, different issues may be more important than the headline earnings numbers – for example the penetration rate of EV in the automotive sector. In this context, European EV penetration increased to 18.8% in 2024 from 17.8% in 2023, with year-on-year growth accelerating to 8%. In China, EV penetration soared to 44%, up from 35% the previous year, with a remarkable 31% growth year-on-year. While the automotive sector as a whole is pushing on with its investments in EVs, certain players are focusing instead on other technologies (like hybrid) which may help us bridge the gap as we move towards a decarbonized mobility sector.

Companies reporting substantial progress in ESG initiatives, such as sustainable supply chain practices, energy-efficient operations, and compliance with new environmental regulations, have often seemed to be treated favourably by the market, even if they have faced earnings pressures due to initial high sustainability-related investment costs. But establishing a firm cause/effect relationship here is difficult, given firm and sector-level complexities.

What is clear is that, while immediate financial results may vary, the integration of robust ESG strategies is increasingly seen as essential to long-term profitability and market competitiveness, aligning with investor expectations and regulatory trends.

Our view: “walking the talk”

Achieving sustainable transformation requires thinking in novel ways about well-known problems. Part of the challenge here is understanding not just what we think, but why we think the way we do.  Academic papers on philosophy or psychology can help. One I read recently was Frontiers | Affording Sustainability: Adopting a Theory of Affordances as a Guiding Heuristic for Environmental Policy (

The paper looks at the pressing issue of why we tend to “talk the talk” on environmental issues but don’t “walk the walk” in terms of adopting our economic behaviour accordingly. It argues we should think in terms of affordances (the action possibilities afforded by objects or environments) and how they are linked to the gap between our possessed values, knowledge and attitudes and our behaviour.

We need to see this relationship between our cognition and behaviour as dynamically constructed in an ecological system – i.e. one that is not static (back to the subject of “change” again!). Getting this relationship to evolve will depend on effective feedback loops that are flexible. What would be a good example of such a system working in practice? The paper points to recycling as something that people automatically perceive as important, reinforcing expectations and social practices (not just for monetary gain). I find this argument that we need see our environmental behaviour in terms of dynamical or coupled systems compelling, and it means we have to think beyond “nudge” approaches designed to encourage one-off changes in behaviour. The challenge now is to pick areas where an affordance approach can have a large impact.

This article is also published on the author's blog. illuminem Voices is a democratic space presenting the thoughts and opinions of leading Sustainability & Energy writers, their opinions do not necessarily represent those of illuminem.

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About the author

Markus Müller is Chief Investment Officer ESG & Global Head of Chief Investment Office at Deutsche Bank Private Bank.

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