Angry Clean Energy Guy Assaad Razzouk explains his problems with ESG investing and his solution for addressing at least some of them.
Assaad Razzouk is the CEO of Sindicatum, a Singapore-based firm which develops, constructs and operates clean energy projects across the Asia-Pacific region. The day-to-day business of raising finance from investors and delivering large-scale solar, wind and storage facilities throughout a diverse region has given Razzouk a keen understanding of the practical realities of sustainable investment.
“People still vastly underestimate renewables deployment this decade. In Europe, it’s about decarbonisation. In Asia, it’s mainly about meeting energy demand growth, because they’re under-served markets,” he says.
“Frankly, there’s an enormous amount to do, because each country is different, and you have to specialise differently in each market. You have to have local presence, local expertise and local relationships with a range of stakeholders, from regulators to village heads to mayors – because you’re in their backyard.”
Razzouk puts these insights to good use on the boards of several organisations focused on supporting sustainable development and tackling climate change. Recently, he has gained a strong following of social media (including 140,000 followers on Twitter), partly for his weekly summaries of positive news relating to climate action, but also due to his podcast series, titled ‘The Angry Clean Energy Guy’.
“The bridge from my day job to my evening job – as the Angry Clean Energy Guy – is that, in Asia, you see the impact of climate change with your own eyes,” he explains. “I deal with typhoons, floods and heatwaves, and the poor communities that are badly affected by them, in almost every market.”
Released at regular intervals over the past two years, Razzouk’s half-hour podcasts touch on topics from insects to AI and from EVs to IPOs, but he maintains a relentless focus on the need to address the climate emergency. In these monologues, Razzouk isn’t so much angry as single-minded. His clear, patient, fact-filled style of delivery would be soothing, if it wasn’t for alarming implications of his subject matter.
Recently, his podcasts (and tweets) have focused on what he sees as the shortcomings of ESG investing. His first complaint is with “pretend ESG”, the investment solutions that are branded as sustainable, but which contain more or less the same holdings as when they were badged as global opportunity funds or similar.
In recent years, ESG investing has seen record inflows regularly reported in both the retail and the institutional space. But accessing credible offerings remains a challenge in both markets. A recent analysis of investment websites by Carbon Tracker found that only 30% provided filters to narrow searches beyond ‘ESG’, while none specifically allowed investors to filter out deforestation risk.
Razzouk also points to the fact that 87% of the 253 European funds reported by Morningstar as having been repurposed by managers in 2020 were rebranded through the addition of terms such as ‘sustainable’ or ‘green’ to their names, rather than necessarily undergoing any fundamental portfolio reconstruction.
Perhaps counterintuitively, Razzouk’s second complaint about ESG investing is its isolation from the mainstream of business and finance. Today, whether contained in sustainability reports or voluntary reporting frameworks, ESG-related metrics are filed away from the traditional metrics used to determine companies’ financial performance and value to investors. To the uninitiated, they are invisible.
Razzouk is strongly supportive of the regulatory reforms and industry initiatives aimed at more effective reporting and management of climate and other ESG-related risks, such as the IFRS Foundation’s current work toward a Sustainability Standards Board, and its climate-first approach to establishing global standards which can form the basis mandatory reporting requirements for corporates.
Although the consolidation of existing sustainability reporting frameworks by the global accounting standards-setter is welcome, this approach still requires investors and analysts to make an extra effort.
“In reality, all you’re doing is creating a big bucket, called ESG, which is not on your balance sheet or income statement, and you’re completely ignoring it when looking at the financial condition of companies,” says Razzouk. “Whereas, to me, ESG is a living, breathing thing. It impacts and it should impact everybody’s financial statements.”
Razzouk also takes some heart from initiatives such as the Impact-Weighted Accounting Project developed at the Harvard Business School, aimed at developing a new framework whereby environmental and social factors are weighted and costed accurately in financial statements. “It’s sound, but it’s over-ambitious. In a climate emergency, we don’t have time for over-ambitious multi-year initiatives,” he says.
E, above S and G
A third complaint Razzouk has with the concept of ESG investing is that its three components collectively present a more weighty and complex set of challenges than investors – or anyone else – can feasibly handle in a climate emergency. Not to discount the importance of social and governance factors, Razzouk nevertheless warns that grouping them inextricably together – and trying to tackle all three simultaneously – can lead to inertia and excuses for inaction.
“’E’ is a completely different cup of tea,” he insists. “Some genius in obfuscation stuck it with ‘S’ and ‘G’, so that we can forget about it. It promotes the status quo in a very powerful way.” The rush for ESG products will lead to “an epic greenwashing party”, without achieving material change on the ground, he worries. “Many people [in the finance sector] mean well and are trying to do the right thing. But sometimes you’ve got to cut through the noise and do the one thing that will have 80% of the impact.”
Many asset managers, he argues, see the business opportunity of ESG investing, but not necessarily the responsibility. “Asset managers are using the ESG bandwagon to reclaim market share, without either thinking it through or effecting real change. By the way, real change doesn’t mean necessarily diversifying from Exxon. It just means pricing assets correctly, and managing the risk of stranded assets.”
A key barrier to change, says Razzouk, is compensation structures geared toward short-termism when finance sector executives are increasingly being asked to make decisions based on a long-term view. “The compensation issue is relevant for everybody, not just asset managers, but corporates too. There is no easy way around it, but we don’t have time to change it,” he admits.
“I want everybody to be vegan, and not to fly, and to ride a bicycle, and to buy an electric boiler, and I want to change global executive compensation. It’s never gonna happen, right?”
A short-cut to transparency?
As one might expect, given the requirements of his day job, Razzouk prefers solutions to complaints. With his single-minded focus on the climate emergency, he proposes a ‘rough-and-ready’, but potentially powerful, approach to reflecting firms’ emissions in their financial statements.
By setting a carbon price of, say, US$50 for every tonne of CO2 emitted – prevailing prices in the EU Emissions Trading System (EU ETS) would put it closer to US$60 – then multiplying it by the amount of emissions from a company’s business operations and adding the US$ total to its costs, he says, financial statements would give the market a more accurate view of its environmental impact.
“You don’t even have to take it through your income statement. But I want to see a nice big footnote that shows earnings net of US$50 times CO2 emissions. The accountants can pick whether that’s Scope 1, 2 or 3,” says Razzouk, referring to the categories of emissions companies are increasingly reporting under guidelines from the Task Force on Climate-related Financial Disclosures (TCFD).
“Conservatism will probably prevail, and we might end up with just Scope 1 and 2 emissions, but it’s a start. And it will impact earnings very materially.”
Razzouk says some investors are already doing their own calculations along similar lines, including at least one Asian sovereign wealth fund. “People are out there thinking about it,” he says. “The risk [of other more complex approaches] is that we’ll bury information in buckets which very few people are qualified to write or read. We don’t have time for this. If you’re in an emergency, you’ve got to act.”
It’s an imperfect solution, he admits, but estimates it could capture around 80% of companies’ environmental impact. “The methodology is easy to apply, the data is out there. And even if it’s applied five years from now it’s still a very good thing.”
For maximum impact, says Razzouk, a major financial institution or ratings agency should take on the task. “Take the top 1000 companies, reorder them based on real net profits, and I’m sure it will show you something that you didn’t know before.”
There is, of course, no regulatory impediment to firms taking the initiative themselves, says Razzouk. But he does not under-estimate the ramifications of making the costs of emissions explicit through carbon-adjusted reporting. “It will affect executive pay very materially, so it’s going to take some courage.”
The power of carbon pricing to change strategy and investment decisions was reflected in the latest annual Refinitiv Carbon Market Survey, released this week. According to the survey, more than half of regulated emitters active in the EU ETS said the system “continues to cause emissions reductions”. Further, 63% said EU ETS was a decisive factor for investment decisions, compared to 27% in 2020.
But Razzouk does not consider the growing use of internal carbon pricing mechanisms by corporates, reported by climate disclosure platform CDP recently, as encouraging, on grounds of its minimal effect on their business activities or plans. “Surely if Exxon is using an internal carbon price, it would not drill for any more oil and gas. Internal carbon pricing is untransparent, not properly communicated to the market, and appears to have little financial impact.”
Shift in investor behaviour
One of the reasons for Razzouk’s recent focus on ESG investing is a clear shift in the behaviour of institutional investors weighing up participation in Sindicatum’s infrastructure projects. This is of course to be welcomed, he says, noting in particular an increased awareness of the importance of respecting the rights of indigenous peoples.
But the lengthy questionnaires that accompany ESG-consciousness sometimes appear to be geared more toward minimise risks to the investor than tackling the actual ESG challenges on the ground, in terms of delivering positive sustainable impact.
“We have detected in enormous amount of increased interest in ESG over the last two years. It has become a far more important and standalone vertical in the due diligence by institutions. That is a good thing. However, the motivation has to be more than checking boxes and covering liabilities. You have to effect change, not just fill a bucket, check it once a year, and carry on as you were doing before,” says Razzouk.
“For 90% of institutions, it’s just risk management. Risk management is about not doing things, as opposed to what we need, which is for this stuff to be embedded in the DNA of all these institutions, so that they actually do things differently,” he says.
In every podcast and in many of his tweets, Razzouk gives evidence of progress and reasons for optimism. Even when railing against organisations for not moving quickly enough, he will acknowledge, “There is a sliver of institutions that are trying harder.”
Razzouk will continue to be The Angry Clean Energy Guy. But he will remain an optimist too.
“The nature of the problem is such that you have to be continuously optimistic, because every action you take – no matter how late – will have an impact in limiting warming from whatever you’ve banked to the next level. Even if we warm by three degrees, you still have to be optimistic because you’re fighting warming of four of five degrees, or worse. The optimism is built into the nature of the problem. You can never give up or not be persistent.”