By ROBIN POWELL
After years of extraordinary growth, the industry that's built up around environmental, social and governance, or ESG investing, is facing a backlash.
Some are now questioning the entire premise of ESG investing, seeing in it a type of “woke capitalism” that gets in the way of shareholder interests.
For ROBIN POWELL, ESG definitely has its problems, but it shouldn’t be used as a political football. Some of its opponents, he says, are just as politically motivated as its supporters, and arguably even more so.
Just over half a year since the COP26 conference in Glasgow, where a united finance industry rallied behind the goal of a greener future, voices of opposition are growing to the trend of sustainable investing.
Some of these opponents are from within the green investing movement itself, warning that some asset management firms, seeking to capitalise on demand, have been rushing out green-labelled products with little substance behind them.
Others, such as former journalist and HSBC Asset Management’s head of responsible investment Stuart Kirk, have accused policymakers of blowing out of proportion the financial risks of climate change.
Railing against “unsubstantiated, shrill, partisan, self-serving apocalyptic warnings”, Kirk shocked a recent Financial Times conference to silence. For his troubles, he was suspended pending an internal investigation.
While insisting he is not a climate science denier at all, Kirk believes the financial effects of climate change are small over typical corporate investment horizons. “We can solve this through adaptation,” he said.
The question is how much of this reaction is due to legitimate concerns about hazy measurement and inconsistent implementation and how much of the opposition is purely ideological.
I had a sneak preview of this backlash against ESG at a conference I spoke at in Surrey last month. Like most of those who attended, I’m broadly in favour of ESG investing. It’s not because I think it’ll generate higher returns; economic theory suggests, on that contrary, that sin stocks are likely to deliver a long-term premium.
I certainly don't expect ESG investing to solve the climate crisis and make the world a much better place. But I do think it will make a positive difference and, in the great scheme of things, there are bigger priorities than maximising our investment returns.
But clearly there are many people who disagree with me on ideological grounds. One of them, a financial adviser called Nick Lincoln, was a fellow speaker at the afore-mentioned conference. The climate crisis, he told us, was a fabrication, and ESG a left-wing conspiracy.
Another ESG refusenik who I suspect falls into the politically motivated category is Mark Dampier, the former Head of Research at Hargreaves Lansdown best known as the arch-promoter of the disgraced fund manager Neil Woodford. Climate change, he wrote the other day, is a trillion-pound industry spawning more hangers on, think-tanks, green publications and pressure groups than any other, all with a vested interest in keeping the status quo.
Both Nick and Mark, I suspect, would feel at home in the lobby group Consumers’ Research, based in Washington DC. The group has launched a campaign against asset management giant BlackRock, accusing the company of having ties to the Chinese Communist Party and of undermining capitalism by embracing ESG investing.
Consumers' Research has also targeted a number of large corporations — including Coca-Cola, American Airlines and Nike — over their policies of stakeholder management, diversity, inclusion and environmental responsibility.
Simultaneously, governors in some Republican-governed states in the US have been seeking to strike back against financial institutions which they believe are denying capital to key industries such as coal, oil and gas.
A coalition of about 15 states has been assembled to threaten fund management groups like BlackRock with a withdrawal of state funds.
The backlash received further impetus recently when Standard & Poor’s removed electric carmaker Tesla from its ESG index, alleging incidents of racial discrimination and poor working conditions at one its factories.
Tesla founder Elon Musk responded angrily, describing ESG scores as a “scam” and accusing the movement of being “weaponised by phoney social justice warriors”.He noted that the oil giant Exxon Mobil remained a leading member of the S&P ESG index despite its greenhouse gas emissions being many times as large as the lowest emitters.
It seemed a fair complaint. How could a company whose declared mission is to accelerate the world’s transition to sustainable energy be booted out of an ESG index, while the world’s biggest fossil fuel polluter is kept in?
S&P responded by saying it compares companies like Tesla against its industry peers and it had been sliding down the ranks.The company had also sullied its copybook on the social element of ESG through poor treatment of its workers.
“While Tesla may be playing its part in taking fuel-powered cars off the road, it has fallen behind its peers when examined through a wider ESG lens,” S&P said in a blog post.
In between the more jaded former proponents of ESG investing, the outright ideologues and the spurned executives like Musk, there are those who say the issue is more around a lack of proper definitions and disclosure.
Tom Lyon, a Professor of Sustainable Science at the University of Michigan, has argued that ESG investments need to better reflect investors’ expectations.
Lyon proposes a number of practical initiatives such as stopping the practice where many different measures of ESG – such as human rights, climate change and diversity - are compressed into a single rating.
“Investors concerned about ESG often value different objectives – one investor may really care about human rights in South America while another is focused on climate change,” Professor Lyon writes. “When ESG ratings try to force all of those objectives into a single number, they obscure the fact that there are trade-offs.”
For their part, regulators are now acting in an attempt to boost transparency and clarity to sustainable investing, while preventing so-called “greenwashing” where companies’ claims to environmental responsibility are little more than a public relations initiative.
Leading the charge, the US Securities and Exchange Commission recently has proposed a pair of rule changes to enforce more standardisation of disclosures and to crack down on unfounded claims about ESG.
Funds would be required to describe the specific impact they seek to achieve and summarise their progress. Funds would also have to disclose information regarding their voting of proxies on ESG-related issues.
At a global level, meanwhile, the newly created International Sustainability Standards Board is setting to work on creating a baseline of disclosure standards.
After several years of extraordinary growth in inflows into ESG funds, the money management industry itself is admitting that better explanation is needed about the goals of their strategies and the outcomes. But few think this is just a passing phase.
“ESG is not a fad; it is an investment belief,” Aviva Investors said in a recent blog post.
“Companies, and indeed governments, that conduct their business in a respectful way, with an eye on the long-term, are more likely to succeed over time. Bad practices don’t just hit the headlines, they hit profits as well.”
In short, then, ESG is not a panacea for all the problems the human race is facing. It comes with huge challenges, not least widespread greenwashing. And yes, of course, the fund industry is using it to sell you products you’re better off avoiding.
But none of that makes ESG a bad thing. Given time, standards should improve and, if they do, ESG will, I expect, eventually account for the vast majority of global investable assets.
Like it or not, one day almost everyone will invest this way, whatever their political persuasion.
Picture: Nick Fewings via Unsplash
© The Evidence-Based Investor MMXXIV. All rights reserved. Unauthorised use and/ or duplication of this material without express and written permission is strictly prohibited.