Rows over ratings and executive pay reflect how far ESG integration has yet to run.
If you ran the world’s largest manufacturer of electric vehicles and found yourself dumped out of a leading ESG index in favour of one of the world’s largest polluters, you might feel a bit miffed. Whether you’d then go on a prolonged anti-ESG Twitter campaign, allied with other tech plutocrats, is another matter.
But this was a week in which ESG ratings and the very concept of factoring ESG risks and impacts into one’s business and investment decisions were being challenged. This might be more readily expected from the State Treasurer of Utah than the head of responsible investment at a large bank-owned asset manager, past comments notwithstanding. Overall, however, it shows how much work remains on meaningful and decision-useful ESG integration.
If nothing else, Tesla’s ratings trauma at least deepened the discussion on what ESG scores and indexes measure and how they should be used. But it was far from the only example of incomplete and imperfect ESG investing practice this week. A Morningstar analysis found that bond funds transitioning to SFDR Article 8 status typically prioritised replacing screened-out holdings with almost any bonds that shared their risk/return profile, with little regard for ESG credentials.
And a study of light and dark green European equity funds by Jefferies found almost no evidence of taxonomy-alignment in their holdings, corroborating other recent research. As the US investment bank noted, virtually no firms are releasing data on the extent of their taxonomy alignment, nor should it be the only reason for holding a stock in a green fund. Even so, firms with high degrees of alignment, like Voltalia, are currently being ignored by managers, often in favour of low-emitting, but not necessarily sustainability-orientated, tech stocks.
When some asset owners and managers are still figuring out why they didn’t spot the social and governance flags around Russian investments, it’s no surprise that two leading pension fund managers called this week for new tools, data and skills to fuel the sustainable investment revolution, as well as a greater focus on impact.
Another ESG tool under scrutiny this week is perhaps the oldest – the shareholder vote at the AGM. Despite landing the odd blow, rising shareholder dissent does not seem to be keeping pace with soaring executive pay packets, on recent evidence, leading asset owners to mull alternative approaches.
Research suggests that environmental and social issues fare even worse than governance, with the lack of support given to climate disclosure resolutions at recent US AGMs leading some to suggest large asset managers are not voting in line with their own commitments or their clients’ preferences. Calls are increasing for greater transparency on voting and engagement practices, but for now maintaining dialogue remains overwhelmingly the preferred strategy, especially in California.
If offered the chance, the British public would vote for a windfall tax on oil and gas firms to offset the cost-of-living crisis, despite the reservations of their political leaders. Investors could save them the trouble, according to MSCI, suggesting they could spend their dividends from fossil fuel firms on renewables investments.
Given the accelerated pace of clean energy transition in Europe, India and elsewhere, they will have no shortage of choice. In current circumstances, it might be more viable than investors using their leverage to persuade firms to direct their excess profits away from oil and gas exploration toward renewables.