I don’t think it has escaped anyone in the financial services industry that ‘sustainability’ is a hot investment theme, and on the back of this, ESG-flavoured growth stocks like those associated with electric vehicles, hydrogen fuel cells, or renewable energy have done particularly well. Of course, these stocks have recently seen bit of a pullback, but this might be more indicative of a general weakness in the markets than any meaningful change in the ESG investment theme per se? For what it’s worth, while this trend is in full swing, I find myself curious as to where the trend came from and when it came about.

By all accounts, ESG inflows continue to be strong, and a good performance in the sector during the past year has likely whet investor appetites for more. As I’ll discuss in this post, there is also an underlying cultural driver to these flows, which suggests that the excitement about ‘green’ stocks is likely just one symptom of a wider, underlying, cultural trend. As such, something that might be interesting to ponder how durable the trend is, as it relates to markets: Will the interest in ‘sustainable’ investing last beyond the current stage in the market cycle (i.e. is the trend cycle-agnostic), or is the excitement about ESG investing just part and parcel of the current cycle? In the latter case, even if the sustainability sentiment might cool when excitement about the market begins to sag, it remain possible that the underlying cultural driver of the sentiment might remain intact, just that it’s no longer as pronounced in the market. I won’t discuss the correlation between interest in ESG investing as a theme and the level of excitement in the market in further detail in this post, but it’s something that’s worth keeping in mind.

In previous posts I’ve written about how you rarely see a change happening at first (e.g. [link]), as it’s so subtle at first so to be pretty much imperceptible, and that it’s only weeks or months (or even years) later that you take a step back and realise that a trend is already in full swing and you kinda knew but just didn’t notice until now. Therefore, while I try to be more aware of such themes as they’re developing (as it can be useful for you as an investor to tune into these themes early on and capitalise on them as they grow), every day is full of inputs—many of which could be possible ‘themes’ and you’ll just never know. In addition, as I wrote in the previous post, the culture of a society represents the average ‘temperature’ of a great melting-pot of memes, and while some of the circulating memes grow in popularity while others go down, the changes are so distributed as to be hard to track in any meaningful way in real time.

To get back to the discussion of sustainability, I recently attended a (virtual) conference on the same topic as a conference that I’d attended back in 2019. Surprisingly, one of the most meaningful changes between then and now didn’t seem to have anything to do with the underlying technology of the industry that I was researching, but everything to do with sustainability. To wit, while ‘sustainability’ was mentioned in 2019 as one of many industry attractions, today, in 2021, ‘sustainability’ was presented front and centre and then highlighted as the core attraction of the industry.

I found this change in emphasis to be fascinating, and (sadly, you could argue) the most memorable take-away from the conference was this seemingly obvious observation: That sustainability has gone viral. It’s everywhere.

Allow me bit of a digression as we rehash some of the insights from last weeks’ post:

Memes (as popularised BG Richard Dawkins) are emulated behaviours, in the form of ideas, topics, or behaviours, that spread in a population of brains much like a virus would spread in a population of organisms or an invasive species would spread through an ecosystem. While this spread is conditional on several factors, the appeal of the meme, its longevity (staying power), and the receptivity to the meme in the population of brains would be particularly important. For example, a very appealing meme with low staying power would burn through the population rapidly before fizzling out. Indeed, we see this with viral fads all the time. On the other hand, an appealing meme with greater staying power would spread and then stay around for a while, in the form of a trend (effectively, a longer-lasting fad).

The total population of memes circulating in a population of brains would compose a ‘meme pool’. A better name for this meme pool would be something like ‘culture’; the culture of a society being the aggregate population of memes, some spreading rapidly before fizzling out with others having a more lasting impact on collective behaviours and ways of doing things. The deeper a meme drops in the modified Pace layering model shown above, the more fundamental its impact can be reasoned to be.

In this framework, topics like ‘sustainability’ and ‘ESG’ might be particularly appealing because the collective meme pool is overweight similar and related memes. When this is the case, talking about ‘sustainability’ becomes a culturally acceptable thing to do, and, indeed, it’s something that many people have come to actively seek out and enjoy. (My office cannot be the only one that has been inundated with special interest groups intent to use the office as a battleground for saving the planet.) Closer to home, many parts of the world has also recently gone through a period of shoppers asking their supermarkets to get rid of excess plastic, and I don’t think it’s possible to turn over the tray that your favourite health food is sold in without seeing the manufacturer’s assurances that ‘as much plastic has been cut from our packaging as the food-safety regulators allow us to do’.

In other words, enough ‘activation energy’ on the topic has been injected into the culture though each individual sustainability-related meme that caring for the environment is essentially part of the culture now; it’s just something that we all do without thinking and that we try to become better at be a use it’s the right thing to do. In addition, because multiple ‘sustainability’ memes are already circulating in the population, and because each additional such meme makes people find other, similar memes to be more appealing, we can see autocatalytic meme-amplifying mechanisms begin to take root: If you’re into saving the environment, of course you’ll find additional sustainability-related memes appealing. This means that a culture that is overweight sustainability-related memes will make it easier for additional sustainability-related memes to spread. That’s the environment that I think we’re in today when it comes to topics like sustainability and ESG.

To return back to my experience at the conference, realising that the sustainability meme has grown from a nice-to-have to a must-have in the industry marketing decks in the past 18 months also made something ‘click’ into place as I realised that we’re seeing a viral trend well underway with the current sustainability Zeitgeist. No wonder that everyone is talking so much about ESG these days, I thought to myself at the end of the conference (when things clicked for me): It’s the right meme, at the right time, in the right place!

Armed with this realisation, and as the recovered scientist that I am, I turned to Google Trends to see if I could see evidence of this trend emerging in the search data, and, indeed, there is evidence for a viral (autocatalytic) memetic spread in search keywords like ‘responsible’, ‘ESG’, ‘development goal’ and ‘harmonious’. (Conversely, keywords like ‘sustainable’ or ‘sustainability’ or ‘clean’ or ‘green’ and similar might be too generic to show a reliable signal.) Notably, there is also a marked acceleration of the search term popularity (i.e. onset of what looks like an autocatalytic dynamic) sometime around late 2017/early 2018—presumably when the trend became self-sustaining for whatever reason, where talk about ‘ESG’ or ‘sustainability’ begets more talk about ‘ESG’ and ‘sustainability’.

Of course, at this point, my next question was: What happened around this time? 

Late 2017/early 2018 isn’t exactly ancient history, so I racked my brain to remember what might have happened. I didn’t come up with anything at first, but after listening in to some of my colleagues talking about an unrelated topic, it all came back to me: It was the turtles. The turtles is what happened then.

For those of you who are yet to be made familiar with my obsession with people’s obsession with the turtles, this goes way back—at least as far back as just late 2017/early 2018—when Blue Planet II premiered on the BBC. The series places a heavy emphasis on sustainability, highlighting the damaging effects that human pollution and littering has on the oceans and the creatures that live in the sea. At the time, many people were already primed for this message as a video with a turtle with a straw stuck up its nose had gone viral earlier in 2017. The video makes for unpleasant watching, so it’s no surprise that it struck a chord, especially when the culture is already ripe for change with climate change looming and the debate about plastic heating up.

Back in late 2017, when Blue Planet II premiered, I remember people stepping up their game in the war on plastic as the BBC hit series added further fuel to the fire. It’s possible (but I’m speculating here) that Blue Planet II helped push the culture from a state of being overweight sustainability-related memes to a state where sustainability-related memes became self-perpetuating. (To put this into physics terms, at the point the sustainability-related meme—either because of Blue Planet II or something else—became self-perpetuating, the cultural meme ‘symmetry’ had been broken and an outlier sustainability-related collection of memes could begin to compound where the popularity of sustainability-related memes were feeding on the popularity of the sustainability-related memes that had come before.)

At the time, before I started learning about complex systems and realising that culture is a melting pot of circulating memes, I was also woefully naïve, and I remember trying to stem the tide by appealing to reason in an intra-office note:

The popularity and durability of plastics, coupled with a lack of adequate recycling efforts, has allowed plastics pollution to proliferate. Sexed-up nature documentaries (typically) narrated by the honeyed tones of David Attenborough (or local equivalent) have raised awareness of this problem, giving rise to well-meaning social movements to reduce plastic use—while simultaneously failing to ascertain how such change is best affected.

Developed economies are typically high-consumers of plastics—but they are also efficient at collecting these via efficient recycling waste streams. Though much work remains to be done before a truly circular economy becomes reality, what televised vistas of pristine beaches spoiled by droves of discarded plastic fail to convey is that an estimated 64 % of plastic waste in the world’s oceans is derived from a handful of rivers in the developing world.

Indeed, a quick toying-around with some numbers from some twenty countries globally suggests that there is a relationship between a country’s GDP per capita and the efficiency of its recycling stream (see FIGURE 1). This suggests that greater change might be affected by consumers choosing not to eschew pre-packaged produce at the supermarket, but by promoting efforts that reduce poverty—both globally as well as closer to home.

As you can tell from this excerpt, I was a bit snarkier back then. In fact, this episode (and several related ones, for better and for worse) actually did a lot to help me adjust my tone.

Please, indulge me for a bit as I reminisce:

At the time, some co-workers riding high on the anti-plastic crusade decided that we needed to get rid of paper cups and plastic stirrers in the office. Now, this wouldn’t have affected me directly, as I always brought my own mug to work as I found the using and tossing of multiple paper mugs every day to be pretty wasteful. But, I liked having the paper mugs around on the occasions when I left my mug at home by accident (as we didn’t have dishwashers in the office and I reserve the right to find communal workplace sponges to be a bit iffy), and I also felt that it was unprofessional to ask guests to a firm in the financial-services industry to please bring their own mug when visiting (because, turtles). Essentially, the paper mugs had their uses. Long story short, I shared my view on the topic, arguing that we should keep the mugs but maybe encourage heavy users to cut down. (Indeed, some of the managers were self-confessedly too “lazy” to either bring their own mug or recycle the paper ones.) I was a bit too snarky in making this argument, using numbers and pointing out that the coffee (especially if you used milk!) probably had a larger carbon-footprint than the mugs themselves, so if we were really interested in saving the planet, then maybe we should get rid of the communal coffee machine altogether. For some reason, that I had the gall to make this argument on the intra-office messaging board turned out to have been beyond the pale, and so I was eventually called into my boss’s office for an unofficial reprimand: I wasn’t allowed to argue facts (part of the front-office staff as I was) on office-wide channels, he said, before explaining that it ‘wasn’t good for intra-office relations’.

So that’s what happened with the turtles, and that’s’ why I find people’s obsession with them to be so fascinating: One viral video in 2017 led to my unofficial reprimand and a 2020 inbox full of job offers from ‘ESG-themed funds’.

Back to the topic at hand: For any company operating in any industry, it’s a greatmarketing strategy to lean into self-perpetuating cultural trends like these, as a lot of the groundwork has already been done: If you want to market a product, you just tap into the autocatalytic Zeitgeist and say that your product is aligned with x. Such marketing can also become even more powerful if you’re of an analytical bent and once the memetic origins of the trend are understood, as it allows you to ‘ride the wave’ for as long as it’s accelerating, and then get off before the trend has burned itself out. In this way, marketing is no different from investing— as you’re just engaging with a different pool of assets. This is why trends and memes and the collective meme pool itself (e.g. what we otherwise call ‘macro’ in an attempt to differentiate it from more fundamental concerns) is important to track and to understand and it’s something that I think we as (investment) professionals need to become much better at.

Understandably, marketing is also something that everyone has to think very hard about: When doing marketing, you’re basically creating new memes, and once let loose into the world, these memes must be curated and managed in attempts to optimise for the upside of viral marketing while anticipating the negative aspects that a backlash would bring. Ultimately, marketing, for better or for worse, sits at an uncomfortable nexus between these two concerns, and many industries need to find ways to align themselves with the Zeistgeist.

Accordingly, leaning into something like the sustainability or ESG trend is an easy way for investors and asset managers to do this, as the memes are already prevalent in the culture (and presumably, the client population), and so the autocatalytic flywheel keeps spinning and more ESG funds are born because the WSG flows were so strong, and the more funds there are, the more believable the investment theme seems to be, and the greater the inflows become. Ultimately, we’ll just have to wait and see where it all ends up, even if, for now, it probably means that I will be thinking of turtles at my next conference as well.