For nearly a decade now, a segment of market professionals on Wall Street, the City of London and elsewhere (you know who you are) have denounced sustainable investment strategies as nothing more than a marketing ploy. Impact strategies and the ESG data underpinning them, this argument goes, are just a quaint echo of the fading Millennial moment, that time of absurdist “challenge goals” for ending war and poverty, talk about the triumph of democracy, and naïve claims that national sovereignty was now obsolete.
The spokesmen (and yes, they usually are men) for this tribe speak with end-of-times brimstone about the perverse effects of the ESG movement.
- “Politically-motivated activism does little to enhance shareholder value,” claims Chris Netram, vice president of tax and domestic economic policy at the National Association of Manufacturers, a group that has organized a campaign against ESG investment principles, the Main Street Investors Coalition.
- “Frankly, I view ESG as a problem for our marketing department, and a disaster for returns,” says a senior wealth manager in Darien, Connecticut, whose views are not uncommon in the trade. “My job is to make money, not to save the world.’
- Mark Perry, an economist and scholar at the right-leaning American Enterprise Institute (AEI), writes with horror of the “alarming trend” of pension funds that “are increasingly being used for activism.” His example: CalPERS, the huge public employee fund for California, and NYCERS, a similar New York City retiree fund, “have both embarked on strategies investing heavily in alternative energies at the expense of more traditional energy sources.”
My God, Martha! Lock up the silver, get the children to the root cellar and hand me my shotgun!
Straw Men and Canards
It’s an old trick, of course: In order to undermine faith in one thing (ESG data and impact strategies), associate them with other trends now in decline (the post-Cold War spread of democracy) or which have fallen into disfavor (globalization).
The ‘antis’ have notched a few victories, too. Besides the obvious ones – the Paris Accord pullout by the Trump administration and its sustained pruning of Obama-era environmental regulations – a more recent April 10 executive order proposes to eviscerate the Department of Labor guidance requiring that factors other than returns be used by pension funds to judge the fiduciary viability of an investment. This could discourage proxy votes of the kind that force fossil fuel companies or manufacturers (for instance), to release relevant data.
This is the pointy end of the anti-ESG sword. Along with disparaging remarks – and even as they encourage greenwashing by marketing teams – executive orders like this one will enable companies and their investors to dismiss ESG on terms friendly to their political agenda: As an evil plot by limp-wristed globalists to destroy the carbon economy, child labor and corporate misogyny, too.
Our Own Worst Enemy
In spite of the lobbying efforts of NAM and bleating from the naysayers, demand for ESG and deeper impact strategies continues to grow. In April, the Global Impact Investing Network (GIIN) estimated total sustainable investment AUM at $502 billion as of the end of 2018.
“We’re at the tipping point,” says Robert Eccles, a professor at Oxford’s Said School of Business.
In an interview last month with Harvard Business Review, Eccles noted that more than 50% of investments in Europe now qualify as “sustainable” in some form. The number for Canada is over a third, and in the US about one quarter.
Eccles found that number surprisingly high. Bank of America asked corporate clients what percentage of their assets they thought were held by sustainable investing shops, and they thought it was 5%, he said.
But ESG has a problem that can’t be wished away. In spite of sustained investment in data methodologies and genuine cooperation between competing suppliers, the abstract nature of what is being measured – environmental practices, social impacts and labor metrics, corporate governance, gender and racial balance, and of course, and transparency – disparities are inevitable.
The risk of false positives is immense. So is the risk of greenwashing.
A great example emerged in July 2017 when Britain’s Royal Society of Engineering issued a report on biofuels which pointed out that palm oil diesel producers, which ESG managers pursuing “negative screening” had flocked to in 2015 and 2016 in the mistaken assumption that they were greener than traditional diesel production, actually caused 40 times more greenhouse gas emissions.
In 2018, after a Chinese utility issued $1.5 billion in “green bonds” to build a so-called “clean-coal-fueled” power plant, an outcry among ESG watchdogs prompted the Bank of China to remove “clean coal” from further green bond funding. Nonetheless, the plant was funded, as hundreds of others around the world were before the nonprofit Climate Bonds Initiative blew the whistle.
The lack of globally accepted standards – a subject for a future column – certainly causes confusion. CLSA, an investment advisory and consulting firm based in Hong Kong, notes in a recent report that confusion over how to apply ESG data and what it actually measures has slowed uptake of sustainable strategies in Asia. “The lack of consistency between scoring methods,’ the report says, “underscores the danger of relying on a simple final score to make decisions.”
ESG data providers like MSCI, Sustainanalytics, RepRisk, Refinitive and others are fighting back of late. In a June 12 blog post on the Sustainanalytics site, for instance, Trevor David, the company’s client relations manager, counters claims that ESG metrics are worthless because they only reflect what companies choose to release. “ The antidote to greenwashing in company disclosures is diligent and thorough analysis from experienced professionals,” he writes, noting there are hundreds of other inputs that affect a company’s final ESG rating.
Liesel Pritzker Simmons, co-founder of the impact fund Blue Haven Initiative, says the data providers have a point. She sees the squawking over ESG data as another effort to discredit sustainability. ESG metrics, she says, are a starting point for research, not a Good Housekeeping Seal of Approval.
“I often feel like the impact space people want it to be easier, they want somebody to come out unequivocally and say, ‘this company is better than that company,’’ she told me in an interview.
“Ratings are fine, it’s a place to start, that’s where you start the conversation. But being an impact investor means you have to look under the hood of what those rating mean.”