Rampant criticism of green investment will only accelerate its maturity.
In the two weeks since our last blog, and the three since the Financial Times’ Katie Martin first tweeted about Stuart Kirk’s fêted and ill-fated climate-risk speech, there’s been an avalanche of comment on the failings and misunderstandings of ESG investing.
On social media, it’s been hard to avoid click-bait hot-takes, often headlined ‘Kirk / Musk / Fixler was right’, while the financial press has enjoyed the clash of industry titans over ‘woke capitalism’. ESG investing is now either in its death throes, a luxury we can’t afford, or an ill-defined, hype-laden conspiracy to defraud investors and prevent billionaires from making an honest buck.
Has the sound and fury signified anything? The responses, both intemperate and measured, certainly reflect the pace at which the concept of ESG investing has been adopted and adapted over the past five years. This hype cycle is inevitable for any idea that gains sudden popular currency, and there’s no doubt active asset managers have grasped the opportunity with both hands after a decade of being bested by passive funds.
As Impax CEO Ian Simm said recently, attempts to define ESG investing have always been hard due to its dual heritage across ethical investing and risk management. The task has become harder still when sustainable, green and ESG vehicles are now ubiquitous and marketed as achieving almost any objective and solving any problem.
ESG investing can’t live up to these expectations. Nothing could. As with any rapidly adopted phenomenon, the rules and the tools have not been fully developed. We’re all still working out the best approach, in terms of data and decision-making, and probably will be for some time. ‘Best approach’, of course, meaning the most suitable strategy for specific investor needs, rather than the straightjacket some perceive.
ESG investing will continue to be a broad church, reflecting the desire of investors to make balanced, long-term investment decisions in an era of severe systemic risks. As its dual heritage suggests, ESG investing can help investors to identify and manage risks to enterprise value that simply were not reflected via the traditional practices and protocols of financial reporting. It can also be a way of accounting for ‘externalities’, the risks and impacts on society and environment that were previously outsourced, but which are so pronounced to require firms to accept their responsibilities.
And, yes, it can provide a framework for those looking to redefine the limits of fiduciary duty, directing capital largely or exclusively to investments with a positive environmental and social impact, should they so choose.
Ultimately, ESG investing can be seen as bringing a wider range of information to the attention of investors, so that they might reach their decisions with a fuller understanding of how these may play out in the long term. This is not only sensible in a world that has too often suffered at the hands of short-termism, but increasingly a technological reality.
The tools, rules and frameworks do not yet exist to do this perfectly, but much time and effort is being focused on improving the current situation. ESG ratings, for example, are widely misunderstood and maligned, not just by billionaires. They measure enterprise risk not sustainability impact, they oversimplify complex underlying realities, they make assumptions due to yawning data gaps – and they’re not even consistent.
Institutional investors may be unhappy about the above, but they know the failings, are generally equipped to handle the ambiguities and are engaging with providers and regulators to ensure the situation improves. The latter are also working to enhance investor access to reliable, verifiable data from corporates, while cracking down on greenwashing.
As the FT’s Gillian Tett noted recently, ESG investing is maturing not dying. As it does, new tensions will arise, new lessons will be learned and different decisions will be reached by investors. That is to be expected and welcomed.
Many of ESG investing’s detractors should still be listened to. University of Oxford Professor Bob Eccles recently characterised ESG investing as being so mainstream now to be a target for more than one set of critics, and their concerns are certainly varied.
DWS whistleblower Desiree Fixler acted out of a commitment to ‘green meaning green’, while Tariq Fancy continues to engage on ESG themes, following his three-part account of his experience as Global Head of Sustainable Investment at BlackRock. Fancy worries that ESG Investing is a dangerous placebo that gives investors the false impression that putting their savings in green funds will be enough to save the world, giving governments the excuse not to act.
He’s probably right that votes at elections count more than votes at AGMs in the fight against climate change, but the fact that investors and corporates are largely backing regulatory and legislative change on climate and other ESG themes is more likely to hasten government action than slow it. Managing the balance between short- and long-term factors is at the heart of ESG investing but there’s nothing new or exclusive in that.