News Analysis

Is ESG investing too little too late?

by Alex Crimmins


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ESG investing is a good thing, right? Surely it is a positive development if the world’s big investors and pension funds move their money away from polluting stocks like oil, gas and coal and into funds that support our planet and its people? Or is it all a bit too little, too late?

ESG is a relatively new concept and practice, and on the surface it appears to be a good thing. However, all is not as it seems. Some believe ESG is a bit of a smokescreen, and say it’s only a drop in the ocean in the face of the real problems facing our planet.

Is it too late?

Human communities and economies worldwide are being battered by a seemingly endless stream of climate-related disasters. Many now wonder: is it too late to save the planet and the majority of species that live on it?

To save the planet, it is estimated that global warming should be limited to well below two, preferably to 1.5 degrees Celsius, in line with the Paris Agreement.

Many companies, regions, cities and countries now have carbon neutrality targets and carbon-free solutions are very competitive across economic sectors.

Due to this trend, there has also been a marked increase in business opportunities in both the power and transport sectors, and investors are putting their money into so-called environmental, social and governance (ESG) funds.

However, is this all too little, too late? Is ESG just a placebo, a nice distraction for investors to feel good while polluting corporations continue with their ‘profit over planet’ activities?

The horrifying truth and the brink of destruction

The horrifying truth is that the burning of fossil fuels, unsustainable land use, overfishing, and deforestation are some of the many corporate activities that have disrupted Earth’s atmosphere, oceans, and land surface over the past 50 years. These activities pose dangerous health and safety risks to humans and the other species who live on earth.

The emergence of environmental, social and governance (ESG) was lauded as it offered at least a ray of hope.

ESG is the idea that capitalism can right itself. Instead of investing in ‘dirty’ sectors like the fossil fuel industry, investors are pumping more money into greener, more environmentally friendly initiatives.

Could ESG investing ‘persuade’ the big polluting corporations to change their ways and embrace greener forms of doing business?

With so much money being pumped into global ESG funds, it appears that investors may help turn the tide. For example, in 2020, ESG investing managed $35.3 trillion in assets, representing more than a third of all assets in the five largest global markets. The trend shows no signs of slowing down.

So far, so good, yes?

It’s a start. However, cracks are appearing in the idyllic world of ESG investing, and they expose an underlying problem.

What’s the problem?

In the target-driven world of fund management, sustainable investing is not what it seems.

What do you mean?

Tariq Fancy, the former sustainable investing chief of one of the world’s most considerable investment funds, Blackrock, came out publicly to suggest ESG is a ‘dangerous placebo’.

A dangerous placebo?

He says that there were some fallacies associated with ESG. “Green bonds, where companies raise debt for environmentally friendly uses, is one of the largest and fastest-growing categories in sustainable investing, with a market size that has now passed $1 trillion. In practice, it’s not totally clear if they create much positive environmental impact that would not have occurred otherwise,” wrote Fancy.

Do you mean green bonds could also have ‘dirty elements’?

Yes, a bit like subprime mortgages associated with the fall of the global economy in 2008, green bonds and some ESG funds could be just fronts for companies to secure investment in their less pristine activities.

“Most companies have a few qualifying green initiatives that they can raise green bonds to specifically fund while not increasing or altering their overall plans. And nothing stops them from pursuing decidedly non-green activities with their other sources of funding,” says Fancy.

Would this happen with the full knowledge of the boards of these companies?

It is possible, yes. But such firms and their boards are playing a dangerous game. ‘Green washing’, as it’s called, is where corporations claim green credentials to divert attention away from their less environmentally safe activities.

In his expose, Fancy writes that to change the world honestly, ESG funds would have to be much larger than they are right now. He says they are simply not going to get big enough. “Is a $2bn fund enough to make a difference if the majority of the global economy, with nearly $6tn in private equity alone and some $360tn of global wealth overall (3,000 times and 180,000 times larger, respectively), continue operating business as usual?”

So, where does all of this leads us?

If you sit on a company’s board, you need to ask some very tough questions and dig into the data.

If your organisation is exposed as a ‘greenwasher’, or an investor in greenwashing funds, this carries many risks, including financial and reputational.

And remember, with all this talk of ESG and greenwashing, we can expect to see a rise in ESG rating agencies. These agencies will start producing regular exposes of corporations who are less than green with their ESG claims.

What kind of questions should directors ask when it comes to risk, ESG and policies?

There’s an excellent paper published by Harvard Law School entitled: Running the Risks: How Corporate Boards Can Oversee Environmental, Social And Governance Issues.

This paper goes into great detail about the role of the board in addressing ESG as a risk and details many good questions directors can ask at board meetings, including: 

  • What kinds of threats could ESG issues pose to the company?
  • How could these risks interrelate? When could these risks manifest?
  • What is the company’s process to identify risks from ESG factors?
  • Which ESG risk factors is the company already tracking?
  • What sources were consulted to determine the company’s ESG risks?
  • What are our corporate peers doing on ESG risks?
  • What ESG issues do our top investors think are most relevant to our sector?
  • Did management assess ESG risks that the company could face in 1, 5, 10 and 20 years?
  • What blind spots about ESG risks may exist in the risk identification process?
  • Has the company performed a scenario analysis on the most relevant ESG risks and their possible impacts on the company?
  • Is the board regularly briefed on relevant ESG trends and how these trends could pose risks to the company?
  • Do we discuss our ESG risks at regular intervals?
  • Are ESG issues addressed systematically?
  • How are ESG issues integrated into our strategic planning and execution?
  • What is our risk tolerance for ESG-related factors?
  • Is the company prepared to respond in case ESG risks manifest?
  • Who has responsibility for managing identified and prioritised ESG risks?
  • Could the ESG risks we face disrupt our business model?
  • What business opportunities do these ESG risks present?
  • How is the board currently structured to oversee ESG risks?
  • Would explicit reference to ESG in a committee charter enhance our approach?
  • How should the audit committee address ESG risks?
  • When should ESG factors be elevated for consideration by the entire board?
  • Which ESG risks should be disclosed in financial filings?
  • What information are investors looking for on ESG risks?

So, to answer the question – is ESG investing too little too late?

ESG investing is still in its infancy, but it does show a substantial global appetite for more sustainable investments. The optimist will say this is only the beginning and point to ESG as the best way out of this mess. The pessimist will say ESG can’t compete with ‘traditional’ investing and that corporations are designed to drive profits for shareholders.

In the end, it will be up to shareholders and the boards that represent them. But as the planet warms and wildfires devastate nations and sea levels rise, we can expect much stricter regulations and even sanctions against giant, polluting corporations.

Do we still have a bit of time, though?

ESG is here to stay. We must remain hopeful that it isn’t too late to help save the planet.


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