Hosking Partners is a London boutique founded in 2013 by Jeremy Hosking, a portfolio manager at Marathon Asset Management for over 25 years. It runs a single global equity strategy built on the capital-cycle, supply-side approach — contrarian, long-term, and unusually diversified (350+ holdings) under a multi-counsellor model, managing around $5.5bn.
This report argues that the old ESG investing approach is dead and should be replaced by a simpler 'two-label' system: funds that just aim for returns, and funds that genuinely create real-world impact. The author says buying and selling stocks on the stock market (secondary market) can't really change companies; real impact comes from investing directly in private companies (primary market, like private equity). He criticizes UK regulators for letting stock funds call themselves 'impact funds,' calling it backwards. Key points: listed stocks should focus on returns, not impact claims; private equity/credit is where real impact happens; and a study found that 'traditional' and 'sustainable' fund managers actually behave quite similarly.
One-sentence summary: The author argues that the old ESG investment paradigm (ESG 1.0) has come to an end, and the industry should shift to a "dual-label" system, with public equity strategies focusing on excess returns rather than claiming to generate impact through secondary markets. [Cautious]
The old ESG paradigm has moved from the fringe to the mainstream, with criticism accelerating its evolution.
The article opens by noting that criticism of ESG has shifted from a fringe topic to a mainstream narrative over the past two years—from plotlines in the TV series Industry to hot-button issues in the U.S. presidential election. The author argues this is not the death of ESG, but its evolution toward something more pragmatic, more nuanced, and more useful for investors. The article quotes a September 2024 report from the Cambridge Institute for Sustainability Leadership (CISL): "the hype bubble around ESG has burst in the face of economic headwinds, confusion about what it was seeking to achieve, and legitimate concerns about greenwashing."
The author recalls that in early 2023, they assessed key themes in ESG and responsible investing in this report, highlighting the divergence between Hosking Partners' approach and market consensus. Two years later, the consensus has clearly shifted: more scholars, commentators, and professionals now agree that "the old ESG investment paradigm (what the author previously called 'ESG 1.0') does not work." The article reiterates two of the five constructive suggestions previously proposed, arguing they remain central to the ESG debate, and uses them to look ahead to the ESG landscape in 2025.
The core thesis of the article is that diversified public equity products within a sustainable allocation portfolio should prioritize excess returns, as buying and selling stocks on secondary markets generates virtually no real-world impact, while primary markets are the effective channel for achieving impact. The author illustrates this clearly with a lemonade stand analogy: providing $100 to a lemonade stand to open a second location allows one to attach a "must be zero-carbon" condition, directly influencing the company's behavior; however, buying or selling $100 of that company's stock on the secondary market has no such effect. The author states: "Primary investments, whether through equity or debt, are a zero-sum game. Either the capital exists, or it does not."
Data comparisons further support this view:
| Asset Class | Share of Global Capital Market Assets | Share of Impact Investment Assets |
|---|---|---|
| Public Equities | Nearly 50% | Only 14% |
| Private Equity + Private Credit Combined | Only 5% | 1 in every 2 dollars |
The author notes that this stark disparity reflects the perception of impact investors themselves: "real-world change is hardest to lever via buying or selling securities on secondary markets, and easiest by the provision or withholding of primary, private capital." However, the ESG investment industry and regulators still treat different asset classes as broadly similar, which the author finds disappointing.
The author offers a mixed assessment of the UK Financial Conduct Authority's (FCA) Sustainability Disclosure Requirements (SDRs): on one hand, acknowledging they raise the bar, but on the other, criticizing the last-minute concession allowing public equity products to apply for the "impact" label. As of early October 2024, only 10 firms had obtained labels, with only a few falling under the "impact" category, which aligns with the author's expectation that such funds should be relatively rare in a market dominated by a single mission (pursuing only financial returns).
However, it is disappointing that the FCA abandoned its initial stance during the later stages of policy consultation—namely, that public equity products should not be eligible for the impact label. The author supports this initial position because "marginal impact is almost impossible to prove for a listed equity fund." Additionally (also known as additionality) requires a clear causal chain between each dollar of new capital invested and each unit of new impact generated, a chain that secondary market transactions cannot establish.
Opponents argue for replacing "additionality" with "intentionality," meaning investors need only invest in companies that themselves generate demonstrable impact, without needing to prove that the investment act itself created additional impact. The first public equity product to successfully obtain the impact label was based on this logic. The author considers this "somewhat back-to-front" and questions it using the example of a mining company: a firm might provide critical materials for the energy transition and employment for local communities while also causing environmental issues like water pollution—how is its net impact measured? Even if the company strives to reduce negative externalities, the presence or absence of an investor on the shareholder register is unrelated to the scope or nature of such progress. Can such a product truly call itself an "impact fund"?
The author points out that academic research has failed to demonstrate a reliable effect of changing a company's cost of equity on its sustainability-related behavior, and some studies have even observed counterproductive effects. Therefore, even if positive effects are observed in individual cases, there is no academic consensus supporting the view that merely holding secondary shares of companies generating "positive" impact warrants a management fee premium (whether through marketing labels or additional fees).
The author argues that evaluating the interplay between externalities, management strategy and capital allocation, and long-term shareholder value creation is the core value that "ESG integration" adds to the investment process. Understanding a company's complex web of impacts on its stakeholders and engaging appropriately to guide that impact is a core principle of being an "active owner." But the author explicitly states: "we do not think being an active owner should afford us the right to claim any label, let alone an impact label."
The implicit investment implication of the article is that investors should be wary of products claiming to generate "impact" through secondary market equity holdings, prioritize public equity strategies focused on excess returns, and allocate genuine impact investments to primary markets (private equity/credit). As an asset manager with a single mission (pursuing only the best financial interests of clients), the author believes its incentives are most aligned with a single objective, rather than being split between financial and non-financial outcomes. Readers should note this is a position-holder's perspective—Hosking Partners itself does not pursue impact labels, and its argument naturally contains an element of defending its own investment strategy.
The article proposes a straightforward solution: classify investment products into only two categories—"unconstrained products" (single objective: achieving the best financial returns for clients) and "impact products" (with a clear secondary objective and demonstrable additionality). The author argues that under the current ESG 1.0 paradigm, a large "grey area" of products exists—neither truly unconstrained (and thus aligned with a single fiduciary duty) nor truly impactful (and thus aligned with a secondary objective)—which continues to incentivize greenwashing and capital misallocation. The author states: "allowing a large 'grey area' to exist which consists of products that are neither truly unconstrained and therefore aligned with a single mandate, nor truly impactful and aligned with a secondary, is likely to continue to incentivise greenwashing and capital misallocation."
Under this framework, governments can intervene based on their democratic mandate to incentivize capital flows between these two product categories, while asset allocators can balance strategic portfolios between impact and financial returns. The author notes that Tom Gosling, a researcher at London Business School, supported this direction in a June 2024 blog post, arguing that allocating a modest (approximately 5%) portion of a strategic portfolio to impact products has a solid fiduciary basis and is more compelling than middle-ground ESG 1.0 strategies (such as selective divestment or portfolio "alignment"). The author also mentions that discussions with several institutional clients have been enlightening—these clients are weighing similar issues, and some have already leaned toward similar conclusions.
The article reiterates a recommendation made two years ago: when evaluating the sustainability credentials of public equity managers, asset allocators should focus on how managers think about long-term, intangible value qualitatively, rather than relying on quantitative ESG metrics that may provide incomplete or even misleading descriptions. The author points out that although ESG ratings were still a popular trend at the end of 2022 (especially for the aforementioned "grey area" products), growing evidence shows these ratings are poorly regulated, largely opaque, rarely cross-correlated between providers, disconnected from impact, and often represent little more than the subjective opinion of a single analyst or group of analysts. The author states: "ESG ratings are poorly regulated, largely opaque, rarely cross-correlated between providers, disconnected from impact, and often represent little more than the subjective opinion of a single analyst or group of analysts."
Over the past two years, this trend has gained significant traction: interactions with peers, asset allocators, and other industry experts show that the industry is moving away from over-reliance on metrics toward fostering more qualitative approaches, while AI-assisted natural language systems have reduced the resource intensity of such analysis.
A September 2024 study covering over 500 active managers found that the differences in practice between self-described "traditional" and "sustainable" managers are much smaller than commonly perceived. The study roughly split managers 50/50 into traditional and sustainable labels (Hosking Partners falls into the former). Key findings are as follows:
| Indicator | Traditional Managers | Sustainable Managers |
|---|---|---|
| Incorporate environmental/social (ES) performance "often" or "very often" into stock selection decisions | 66% | 90% |
| Conducted dedicated engagement to improve ES performance of holdings | 64% | 92% |
| Willing to sacrifice even 1bp of return for better ES performance | 24% | 30% |
| Focus on generating ES impact | Approximately 20% | 41% |
The study concludes: "For asset owners, it is important to understand that whether a portfolio manager acts as 'traditional' or 'sustainable' depends more on their investment beliefs and ES constraints than on how their fund is labeled." The author believes this conclusion strongly supports their recommendation from two years ago and underscores the need for clearer regulation of labels, as discussed in the previous section.
The core actionable implication of the article is that asset allocators should push the industry toward a "dual-label" system, while simultaneously abandoning reliance on quantitative ESG ratings when evaluating managers, shifting instead to qualitative analysis of their long-term value thinking. It should be noted that the author (Hosking Partners), as a self-described "traditional" manager, naturally leans toward reducing the regulatory burden of ESG labels—readers should be aware of this perspective bias.
The report argues that Hosking Partners' capital cycle approach is essentially a bubble-avoidance mechanism, and this contrarian thinking not only guides portfolio construction but also shapes its stance on ESG industry trends. The author believes that over the past few years, this philosophy has helped the firm avoid distorting its methodology to accommodate the oversimplified structures of "ESG 1.0." The author's original statement, "it has helped us avoid bending our approach out of shape to meet the oversimplistic structures of 'ESG 1.0'," means: it has helped us avoid distorting our approach to fit the oversimplified structures of "ESG 1.0." Instead, the firm has been able to embrace complexity and better integrate the more value-added elements of "ESG 2.0" analysis, including long-termism and active ownership.
The firm emphasizes that its strategy consistently focuses on performance as the core priority, while maintaining ongoing dialogue with clients and the management teams of portfolio companies. The author describes clients as "a constant and constructive source of inspiration and challenge." The report argues that this pragmatic and constructive ESG approach serves both the best interests of clients and the broader interests of society. Looking ahead to the evolution of trends over the next two years, the author states that the firm will continue to advocate for this approach.
| Asset | Direction | Author's Stance in One Sentence | Key Data |
|---|---|---|---|
| Public Equities (Secondary Market) | Hold & Observe | Should pursue excess returns rather than claiming to generate impact; be wary of products labeled "impact" | Nearly 50% of global capital markets, but impact investing assets account for only 14% |
| Private Equity/Credit (Primary Market) | Not Explicitly Stated | An effective channel for achieving impact; capital either exists or does not | Only 5% of global capital markets, yet $1 out of every $2 in impact investing is allocated here |